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COMMODITY CHANNEL INDEX (CCI)
Doug Schaff
FX-Strategy
| Characteristic: | Momentum Indicator | ||
| Parameter Defaults: | CCI Period | 20 | controls the measurement period for the CCI |
| Plots: | CCI | ||
The Commodity Channel Index is commonly used primarily to identify beginning and ending of cycles in futures markets and also to identify buy and sell opportunities. The CCI may also be used to signal overbought and oversold markets, much like an oscillator.
The CCI is calculated to arrange 70-80% of all price activity falls between +100 and -100 on its vertical scale. Many users believe a long position is indicated when the CCI exceeds +100 while a short position is indicated when the CCI falls below –100 but this interpretation should be based more on an individual's market analysis. For example, it may be decided that -125 indicates taking a short position while a +150 indicates taking a long position for the specific market being evaluated.
Like other oscillators CCI may also used to signal overbought and oversold markets. Levels above the CCIlong line may indicate an overbought market and breakouts below the CCIshort line may indicate an oversold market.
The chart of the USDCHF 4-hourly market shows a successful application of CCI as an overbought/oversold indicator. Note that price reversed on every occasion that CCI moved above 100 or below -100, although one example shows a bearish divergence.
Because of the amount of time it spends in the neutral position (between the CCIlong and CCIshort lines) note that it is not unusual for CCI to miss the early part of a new move. Many users believe CCI crossing above or below zero identifies market conditions before the CCIlong and CCIshort lines are crossed.
