How to Trade with CCI Indicators?

What is Commodity Channel Index (CCI)?

The CCI (Commodity Channel Index) is a technical analysis tool used to determine the overbought and oversold situations in the market and the trend reversal point of prices. Its application is mainly based on the relationship between the value of CCI and its fluctuation range within a specific time period.

The value of the CCI indicator represents the difference between the current price and its average price. It is calculated by subtracting the average price over a certain period from the current price and then dividing it by a constant times the absolute value of the Average absolute deviation. When the absolute value of the CCI indicator is greater than a certain threshold, it indicates that the market is overbought or oversold.

There are several methods for buying and selling signals based on CCI indicators:

1. Overbought and Oversold Signal: When the value of the CCI indicator exceeds the set threshold (usually +100 or -100), it indicates that the market has overbought or sold, and there may be a price reversal. When the CCI indicator exceeds +100, it means the market is overbought and can be considered for sale. When the CCI indicator is below -100, it indicates that the market is oversold and can be considered for buying.

2. Trend Reversal Signal: When the CCI indicator drops from the overbought area to the bottom or rebounds from the oversold area to the top, it may indicate a reversal of the price trend. When the CCI indicator drops below the overbought area, selling can be considered. When the CCI indicator rebounds above the oversold area, buying can be considered.

3. Zero Line Crossing Signal: When the CCI indicator crosses the zero line downwards from a positive area, it may indicate a downward trend in prices; When the CCI indicator crosses the zero line upwards from a negative range, it may indicate an upward trend in prices. Investors can determine the timing of buying or selling based on this zero-crossing signal.

The homeostatic indicator CCI also includes many types, such as daily CCI, weekly CCI, annual CCI, and minute CCI. The daily and weekly CCI indicators are often used for stock market analysis. Although their calculation values may vary, the basic method is the same.

Taking the daily CCI calculation as an example, there are two calculation methods.

The first calculation process is as follows:

CCI (N days) = (TP MA) ÷ MD ÷ 0.015

Among them, TP = (highest price + lowest price + closing price) ÷ 3.

MA is the cumulative sum of closing prices in the past N days.

MD=cumulative sum of absolute values of the past N days (MA closing price) ÷ N

0.015 is the calculation coefficient, and N is the calculation period.

The second calculation method is expressed as the difference between the N-day Moving Average of the median price and the median price divided by 0.015 * the average absolute deviation of the N-day median price.

Among them, the middle price is equal to the sum of the highest, lowest, and closing prices divided by 3.

The average absolute deviation is a statistical function.

From the above calculation process, it can be seen that, compared to other technical analysis indicators, the calculation of CCI indicators is relatively complex. Due to the popularity of stock market technical analysis software, investors do not need to calculate the CCI value, mainly through understanding the calculation method of CCI indicators and becoming more proficient in using it to analyze the stock market situation.

Relying solely on CCI indicators for buying and selling decisions may pose certain risks, so it is recommended to combine other technical analysis tools and market conditions for comprehensive judgment. In addition, setting appropriate thresholds and time periods is also key to using CCI indicators for buying and selling decisions. It is best to conduct testing and validation on simulated transactions or small transactions to improve the accuracy and profitability of transactions.