CCI (Commodity Channel Index) Oscillator

 

CCI oscillator review

CCI (Commodity Channel Index, CCI, fig. 1) was developed by trader Donald Lambert in the 80’s of last century to determine the turnarounds in the raw materials market. Later on, it turned out that CCI was also well suited for Forex trading. Lambert suggested this indicator for work based on the assumption that the price changes cyclically.

CCI oscillator review

Fig. 1

CCI is distinguished by a variety of applications: it determines the levels of overbought and oversold, it is used to determine reversal points, maximums and minimums of prices. CCI performs its functions of Forex oscillator by calculating the deviations of its line from the moving average, i.e. from the average statistical price. Therefore, its high values show that the price is overestimated relative to the average, and its low values indicate that it is underestimated relative to the average.

It is believed that the CCI is more effective to apply on the side flute than on a clear trend. It is also widely believed that the optimal time frame for the oscillator is 1H. If it shows a dynamic growth in the range from 0 to 100, it indicates a strong upward trend, if there is a rapid decline below 100 – it is a strong downward trend.

The CCI values for the month, week and day differ in accuracy. For example, CCI for a month and a week allows you to more accurately identify the periods of opening and closing positions. The work of CCI on the daily interval requires additional indicators for Forex, because in a volatile market CCI may miss strong signals. CCI can be used for marking support and resistance levels and trend lines.

 

Calculation formula

CCI is a line that ranges from +300 to -300, although this oscillator actually has no limitations, so the indicators can be less than -300 or more than +300. But most of its values are in the range of +100% to -100%. Values that go beyond these limits are estimated as non-random and can be the basis for opening positions.

The time interval is the most important parameter for calculating the CCI, on which the accuracy of its parameters largely depends. Traders mainly use the interval preset on the oscillator, but it is recommended to calculate it accurately each time the tool is used, as it will allow to significantly reduce the number of false Forex signals. To determine the interval, it is necessary to open the daily chart of the indicator, define two highs and two lows, the time period between them – it will be the cycle length. One third of this cycle will be the optimal time interval to be used for CCI.

The commodity channel index is calculated by the following formula:

CCI = (0.015 x default deviation)/(typical price is SMA), where:

  • The «Typical price» is the average of the arithmetic maximum, minimum and closing prices;
  • The SMA is based on typical prices for a certain period;
  • 0.015 — constant, which was calculated empirically;
  • The default deviation is the SMA built on the value «typical price – SMA».

 

CCI oscillator in MetaTrader 5 platform

Commodity Channel Index can be called a classical oscillator, so it is pre-installed in the terminals of popular trading systems. In particular, in MT5 it is located in the navigation toolbar on the left (fig. 2).

CCI oscillator in MetaTrader 5 platform

Fig. 2

 

CCI oscillator signals

Donald Lambert suggested the following concept of his signals in the description of CCI: if up to 80% of the oscillator’s value is within the range from -100 to +100 (fig. 3), the buy and sell signals can generate only about 20% of the monitored period:

Forex trading signals at the CCI oscillator

Fig. 3

Other popular CCI signals include crossovers. When the indicator crosses the +100 level from bottom to top, it means the beginning of an uptrend and is treated as a signal to buy. If it crosses -100 from top to bottom, it indicates the beginning of a strong downtrend and is a sell signal.

The CCI is used to work on divergences. Two consecutive oscillator lows above -100 are tracked. If its second minimum is higher than the first one, but lower than the first price minimum, it is a positive divergence and serves as confirmation of the signal of crossing the price of -100 from the bottom up. There are two consecutive CCI highs above +100. If the second high is lower than its first high, but higher than its price high, it is a negative divergence, which confirms the signal of crossing the mark of +100 from top to bottom.

Another signal is the CCI exit above +200 (Fig. 4), which warns that you should not open a position to buy, because once you reach this point, the trend weakens. On the contrary, it is not recommended to open a Sell position if the CCI crosses +100 and moves on, thus showing that the trend is stable.

CCI is used for divergence work

Fig. 4

Also on the CCI indicator you can mark graphical patterns: head and shoulders, triangles and others.

 

Trading strategies based on CCI oscillator

There are a lot of Forex trading strategies implemented using CCI oscillator, ranging from the use of only one of this indicator to multi indicator systems. The strategy for one CCI is to buy at a new high above +100, and to open sell positions at a low below -100. In the first case the trades are entered when the new maximum exceeds the previous one, in the second case – after the formation of a new minimum below the previous one.

CCI is often used with the addition of a moving average (Fig. 5). To implement one of these strategies, a CCI and a simple moving average with a period of 100 is set on the chart, which in this case serves as support and resistance. The strategy is implemented on a timeframe from M5 to M15, on the rebound of the moving average from the price.

Forex strategy with CCI and Moving Average

Fig. 5

The purchase positions get opened when the CCI leaves the oversold zone and the price crosses the MA from the bottom upwards. Sell positions are opened when the indicator leaves the overbought zone and the price crosses the moving average. In another strategy three classical tools are used – CCI, MACD and Parabolic SAR (fig. 6). Recall that the MACD can be called a trend oscillator, it is used to determine the direction of the trend and reversal points. Parabolic SAR is used to determine the trend reversal on the pronounced trend.

Forex trading strategy with CCI, MACD and Parabolic SAR

Fig. 6

The signal to sell will be the exit of the CCI from the overbought zone to a level below +100, the crossing of the MACD line and the placement of the Parabolic SAR over the chart. On the contrary, the signal to buy will be the exit of the CCI from the oversold zone to the level above -100, the crossing of the MACD line and the placement of the Parabolic SAR under the chart.

In another strategy, together with the CCI indicator RSI is used, showing the strength of the trend and the probability of its change. In the CCI settings, the -100 and +100 levels are removed, the interval is limited to -30 and +30 levels. The RSI parameters change the calculation to Weighted Close. Signal to buy – CCI will cross the RSI in the range of -30 from the bottom upwards, respectively, the signal to sell – when CCI crosses RSI in the range of +30 from the top downwards. The specified parameters are not obligatory, the trader should find the necessary settings according to the asset he trades in.

You can add Stochastic to these two indicators to implement another strategy on the timeframe from M15 and above. Within the framework of the methodology, levels -100 and +100 are added to the CCI indicator. On RSI levels 35 and 65 are added. Stochastic is applied to levels 80 and 20, the values of the signal line are excluded. Positions to buy are opened when Stochastic crosses the level 20 upwards, CCI and RSI go out of the oversold zone with the intersection of -100 and 35, respectively. Sell positions are opened when Stochastic crosses the 80 level down, CCI and RSI leave the overbought zone, crossing the indicators down, respectively, +100 and 65. The strategy is not implemented in the case of a strong trend, as the indicators can give contradictory and false signals.

CCI can be used in the strategy with Laguerre indicator (it can be downloaded here) and exponential moving average EMA. In this case, the CCI is set with a period of 14 and levels of +5 and -5. Parameters of the Laquerre indicator are 1, 0.9, 0.1, 0. The EMA period is 120. Opening a buy position is performed when the CCI is placed below -5, the EMA is directed upwards, Laquerre shows the value of 0.3. Sell positions are opened when the EMA is directed down, L shows 1, CCI is placed above +5.

CCI is applied in a multi indicator strategy with Bollinger Bands, ZigZag, ZigZag Pointer indicators and Stochastic (fig. 7). Bollinger bands and the usual ZigZag are pre-installed in trading terminals, ZigZag Pointer needs to be found in third-party sources and downloaded, making sure the files are safe.

Multi indicator strategy with Commodity Channel Index

Fig. 7

Bollinger Bands shall be installed with parameters 20.2 and 20.3. ZigZag indicator shall be installed with parameters 12, 5, 3, its modified version ZigZag Pointer (may be downloaded here) — with the parameters 10, 5, 15. ZigZag can be used without the support of the modified version, but ZigZag Pointer makes the strategy more efficient. The Stochastic settings are: 11,5, 5. The CCI settings are standard, but with the levels -90 and +90 added.

Positions to buy shall be opened when the price crosses the lower Bollinger Band 20,3, both ZigZag indicators shall mark the breakthrough price, Stochastic shall be below 20, and CCI – below -90. Sell positions open when the price breaks through Bollinger Band, with ZigZag and ZigZag Pointer marking the breakout point, Stochastic located above 80 and CCI placed above 90.

 

Summary

Commodity Channel Index is a classic tool of technical analysis, an effective and reliable oscillator, which enjoys well-deserved popularity among traders. It effectively identifies extrema, oversold and overbought, reversals, most accurately shows the market entry points (full truth about Forex).

One of its drawbacks is that during a strong trend the CCI moves too fast from overbought and oversold, which is why there is a risk that the trend reversal signal is detected incorrectly. Therefore, it is optimal to use the CCI with other indicators, using it as a filter of false signals of indicators.


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