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AS Chakravarthy NCFM Academy Hyderabad Stock Market Technical Analysis : Commodity Channel Index
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Stock Market Technical Analysis Courses Training in Hyderabad
Commodity Channel Index was developed by Donald Lambert in 1980. It is a versatile indicator used to identify a new trend. The indicator grown in popularity and is now very common for traders to identify cyclical trends not only in commodities, equities and currencies. The indicator helps to detect an investment vehicle reaching a condition of being overbought and oversold. CCI when used with other oscillators can be a valuable tool to identify valuable peaks and valleys in the asset’s price providing investors reasonable evidence to estimate changes in the direction of price movement of the asset. CCI often used to find reversals as well as divergences.
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a) CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when CCI dips below -100 and overbought when exceeds +100 from oversold levels. Buy signal given when CCI moves back above -100 from overbought levels and sell signal given when CCI moved back below +100.
b) Divergences applied to increase robustness of signals. Positive divergence below -100 and negative divergence +100.
c) Trend line breaks can be used to generate signals. Lines drawn connecting the peaks and troughs from oversold levels an advance above -100 and trend breakout could be bullish. From overbought levels a decline below +100 and a trend line breakout could be bearish.
Formula : CCI=(M-A)/(0.015*D)
CONCLUSION
CCI is a trading tool that provides investors with reasonable evidence to estimate pending changes in the direction of price assets. Trend changes can be identified when CCI crosses a threshold between 0 and 100. It is often used to detect divergence from price trends as an overbought oversold indicator and to draw patterns on it and trade according to patterns. It is similar to Bollinger Bands but presented as an indicator rather than as overbought /oversold levels.
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