Commodity Channel Index

The Commodity Channel Index (CCI) is an indicator used in technical analysis of financial markets.

Developed by Donald Lambert and introduced in his book "Commodities Channel Index: Tools for Trading Cyclical Trends" in 1980, the CCI indicator quickly made a name for itself amongst traders, and is today a staple in virtually all trading platforms.

Although it was initially created to identify cyclical trends in commodities, it is now used for trading other markets as well, such stocks and currencies.

The CCI, like the Relative Strength Index (RSI) is a momentum-based oscillator, possessing a middle line (value of zero), oscillating above and below this middle line with varying wavelength and frequency.

How to Trade with CCI

Even though you’ll find many books and tutorials telling you that the majority of oscillations take place within the range of +100 and −100, this does not automatically imply that anything above +100 is overbought and anything below -100 is oversold.

Attempting to trade reversals based on these levels is very risky. Rather, traders would be better suited to apply a minimum range of +150 and -150 for overbought and oversold levels respectively.

Ironically, the creator of the CCI, Donald Lambert, stated himself, “If the CCI goes above the + 100 line, that’s a signal to establish a long position.

When the CCI drops below the + 100 line, the long position is closed out. The same techniques apply to short positions at the -100 line.”

So how do we combine the above statement of Lambert, with the modern notion that the upper and lower levels of +100 and -100 are used as overbought and oversold levels?

The first answer is, don’t use those levels as potential reversal zones, rather, select something higher as mentioned above.

Secondly, if you insist on using them, then it’s essential to observe price action along with other technical skills and tools, such as divergences, where the direction of the CCI (or another indicator) is continuing against the direction of price itself.

So, if other technical analysis tools are indicating a reversal is forming in conjunction with the +100/-100 overbought/oversold CCI levels, then this is the more likely scenario.

However, if further analysis is showing a strong potential for trend continuation, then adhering to Lambert’s view is the more valid technique.