Commodity Channel Index (CCI) is a momentum indicator used to spot price reversals, price extremes and trend strength.
Readings above +100 imply an overbought and readings below −100 imply an oversold condition. Overbought/oversold conditions may indicate that the price will correct.
About 70%-80% of the CCI values are between +100 and −100, so a buy or sell signal will be generated only 20%-30% of the time. When the CCI moves above +100, a coin is entering a strong uptrend and a buy signal is generated. The position should be closed when the CCI moves back below +100. And vice versa.
Traders can also use CCI to spot reversals.
Divergences can also be applied to increase the robustness of signals. A positive divergence (price is up yet CCI is down) below −100 would increase the robustness of a signal based on a move back above −100. A negative divergence above +100 would increase the robustness of a signal based on a move back below +100.
- CCI is a stochastic oscillator that measures the change in a coin’s price relative to a pre-defined moving average (MA) of the price divided by 1.5% of a normal deviation (D) from that average.
- The Commodity Channel Index is computed with the following formula:
CCI = (Price – MA) / 0.015 x D