7 min read 

The Commodity Channel Index (CCI) is an oscillator-type technical analysis indicator. It is used to spot an emerging trend and determine overbought/oversold levels. This indicator was first introduced by Donald Lambert in Commodities magazine in 1980. Originally developed to identify cycles in commodity trading, it is currently applied to a wide range of assets.

CCI as displayed in the IQ Option trading platform
CCI as displayed in the IQ Option trading platform

CCI compares the current price with average prices over a set period of time. When current prices are above the median level, CCI is relatively high. Alternatively, when current prices are below the period’s average value, CCI is relatively low. The indicator, therefore, provides means for overbought/oversold level identification.

The logic behind

CCI measures the difference between the current price change and the average price change of the underlying asset. When the prices are above the average level, the indicator’s reading tends to be high. When the prices are below the average level, the reading will apparently be low.

The Commodity Channel can be used both as a leading and an additional indicator. When used as a leading indicator, traders might want to trace overbought and oversold levels, as well as bullish and bearish divergences, to predict upcoming trend reversals.

When using CCI as an additional indicator, surges above +100 can point to a strong price action and an upcoming uptrend.  Plunges below -100 can point to a weak price action and a possible downtrend.

Reverse points on the CCI graph
Reverse points on the CCI graph

How to set up?

Setting up the Commodity Channel Index in the IQ Option platform is easy.

  1. Click on the “Indicators” button in the bottom left corner of the screen. Then choose CCI from the list of available options.
Setting up the indicator. Step one
Setting up the indicator. Step one

2. Then simply click the “Apply” button if you want to use the indicator with standard parameters.

3. You can also adjust the indicator to your liking. Note that when used with standard parameters 70 to 80% of CCI readings would fall between +100 and -100. The shorter the look-back period the more volatile CCI will be with a smaller percentage of values between +100 and -100.

Setting up the indicator. Step two
Setting up the indicator. Step two

How to use in trading?

New trend

As mentioned above, 70 to 80% of all CCI readings fall between a -100/+100 range. The fact of leaving these boundaries can be an entry invitation. Should the indicator cross the +100 boundary from below a bullish trend can be expected. Due to a lagging nature of CCI, the uptrend could have actually already be gone. In this case, it is a trader’s goal to determine whether it will last or not. And if yes, then how long.

A bullsih trend identified by CCI
A bullish trend identified by CCI

Similarly, if the -100 line is crossed from above, a bearish trend can be expected.

A bearish trend identified by CCI
A bearish trend identified by CCI

Overbought/oversold

CCI is an unbound indicator, which makes identification of oversold and overbought levels a little bit tricky (yet not impossible). The underlying asset can continue losing its value long after CCI entered the oversold zone as well as appreciate even if CCI has been in the overbought position for quite some time.

The selection of overbought/oversold levels depends on the market and the asset that is being analyzed. In the Forex market, it is widely accepted that the underlying asset is overbought when the CCI indicator is above the +200 mark, a truly hard to reach point. Likewise, if CCI dropped lower than -200, the asset is considered to be oversold.

An overbought position identified by CCI and a subsequent bearish trend
An overbought position identified by CCI and a subsequent bearish trend

Divergences

If directional momentum does not confirm the price, a trend can be expected to reverse soon. When CCI forms a higher low and the underlying asset makes a lower low, a bullish divergence occurs. Bearish divergence will appear when CCI forms a lower high and the underlying asset makes a higher high.

Divergence as a harbringer of trend reversal
Divergence as a harbinger of trend reversal

It should be noted that during a strong trend divergences can be misleading.

Conclusion

The Commodity Channel Index is a versatile technical analysis tool that is used by traders to spot emerging trends and determine overbought and oversold positions. CCI offers a good mix of accuracy and analyzing potential. Other indicators may be required to confirm signals send by CCI.

Trade now

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

GENERAL RISK WARNING

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
73% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Recommended for you