In intraday trading, traders use a variety of technical analysis tools, including charts, indicators and oscillators, to understand market supply and demand and investor psychology. Amongst these tools, momentum oscillators occupy a special place in a day trader's toolkit. These indicators show the movements of asset prices over time and the strength of such movements in helping make accurate predictions.
The Commodity Channel Index (CCI) is one such momentum indicator used by many traders to assess price direction and trends. In this guide, you will learn how the CCI indicator works, its different uses, calculations and more.
The Commodity Channel Index (CCI) indicator is a momentum oscillator used to identify new trends or extreme market conditions. Originally created by Donald Lambert in 1980, this indicator was initially used to identify cycles in the commodity market. Thereafter, traders began using the CCI indicator for different markets, including equities, indices, futures and options.
CCI measures the difference between an asset’s current price and average historical price over a given period. Its value is high when the trading current price is far above the average price and low when the current price is far below the average price. In this way, the CCI indicator provides oversold and overbought signals.
Traders use this technical indicator to understand price trends and direction. They use it to determine if they should enter or exit a trade, avoid a position or build up their exiting positions.
The CCI indicator is a versatile tool used for identifying overbought or oversold signals and spotting new trends and signs of upcoming bullish or bearish divergence. The CCI oscillates around a zero line, with a value ranging from -100 and +100; its value can go outside these ranges since the Commodity Channel Index is an unbound indicator.
Here’s what the CCI indicator shows:
The CCI indicator has the following uses:
To calculate the Commodity Channel Index, you need to determine the mean price of your chosen security and the average of the means over a chosen period. This difference is compared to the average difference over the period and multiplied by a constant to ensure a standard value.
Here is the formula for the Commodity Channel Index for a 20-period CCI: CCI = (AP – 20-period SMA of AP) / (0.15 x MD) |
Where, AP is the average of the high, low and closing price, SMA is the simple moving average, and MD is the mean division (average of absolute difference between AP and SMA over 20 periods.
A scaling factor of 0.15% is also used to ensure that most CCI values fall between -100 and +100.
Here is an example showing how to use the Commodity Channel Index formula:
Suppose Stock A has a high, low and closing price of ₹70, ₹60 and ₹65, respectively, on the previous day. The average price will be ₹65 (70+60+65/3). If the previous day’s SMA is ₹75, the 20-day SMA will be ₹70 (65+75/2). Suppose the mean deviation is 2.4.
In this example, the Commodity Channel Index (CCI) of Stock A can be calculated as follows:
CCI = (65 – 70)/(0.15 x 2.4) = -13.88
The Commodity Channel Index is a multipurpose technical analysis tool that traders can use to identify oversold/overbought signals, divergences and emerging trends. Since it is an unbound indicator, it can show more details regarding price trends and volumes. Despite its name, you can use it to study any type of market-linked asset, including stocks, F&O, commodities, currencies, etc.