Commodity Channel Index
The Commodity Channel Index measures the position of price in relation to its moving average. This can be used to highlight when the market is overbought/oversold or to signal when a trend is weakening. The indicator is similar in concept to Bollinger Bands but is presented as an indicator line rather than as overbought/oversold levels.
The Commodity Channel Index was developed by Donald Lambert and is outlined in his book Commodities Channel Index: Tools for Trading Cyclic Trends.
Trading Signals
Commodity Channel Index is best used in conjunction with trailing buy- and sell-stops.
Ranging Market
- Go long if the CCI turns up from below -100.
- Go short if the CCI turns down from above 100.
Trending Market
Divergences are stronger signals that occur less frequently. They are mostly used to trade intermediate cycles.
- Go long on a bullish divergence.
- Go short on a bearish divergence.
Example
IBM Corporation with 14 day Commodity Channel Index. The days shown are the signal days. Trades are entered using trailing buy- and sell-stops on the day following.
S1: Go short – Commodity Channel Index turns down above the overbought line. This trade is stopped out at the rally before S2.
S2: Go short – bearish divergence. This trade is stopped out during the rally before S3.
S3: Go short – bearish triple divergence.
L1: Go long – Commodity Channel Index turns up from below the oversold line. The next day closes below the low of the signal day, causing the trade to be stopped out. A trailing buy-stop would stop us back in two days later.
S4: Go short – Commodity Channel Index turns down above the overbought line.
L2: Go long – Commodity Channel Index turns up from below the oversold line.
S5: Go short – Commodity Channel Index turns down above the overbought line and bearish divergence occurs.
L3: Go long – Commodity Channel Index turns up from below the oversold line and bullish divergence occurs.
?: The market is now trending (evidenced by the break above the previous high).
Do not go short when Commodity Channel Index turns down above the overbought line – wait for a bearish divergence.
S6: Go short – bearish divergence.
S7: Even stronger signal – bearish triple divergence
.
Setup
The default Commodity Channel Index is set at 20 days with Overbought/Oversold levels at 100/-100. To alter the default settings – Edit Indicator Settings.
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