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Using Commodity Channel Index to determine strong or weak price action

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The commodity channel index (CCI) is an oscillator originally introduced by Donald Lambert in 1980.

Since its introduction, the indicator has grown in popularity and is now a very common tool for traders in identifying cyclical trends.

It was mostly used in commodities but is also equally useful in other securities such as equities and currencies.

The CCI can be adjusted to the timeframe of the market traded on by changing the averaging period.

Traders and investors use the commodity channel index to help identify price reversals, price extremes and trend strength.

As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis.

CCI Scale

  • CCI can be used to identify overbought and oversold levels.
  • A security would be deemed oversold when the CCI dips below −100 and overbought when it exceeds +100.
  • From oversold levels, a buy signal might be given when the CCI moves back above −100.
  • From overbought levels, a sell signal might be given when the CCI moved back below +100.
  • As with most oscillators, divergences can also be applied to increase the robustness of signals.
  • A positive divergence 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.
  • Trend line breaks can be used to generate signals.
  • Trend lines can be drawn connecting the peaks and troughs.
  • From oversold levels, an advance above −100 and trend line breakout could be considered bullish.
  • From overbought levels, a decline below +100 and a trend line break could be considered bearish.

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