What is the Commodity Channel Index?
Although the Commodity Channel Index, also known as CCI, was developed to be used for futures, it is also used in the stock and foreign exchange markets. Created by Donald Lambert, this indicator helps traders determine reversal points in the commodity markets. Similar to RSI and the Stochastic Oscillator, CCI is used to determine if a stock is overbought or oversold. It represents the position of the current stock price in relation to the average price over a selected period of time.
How Do I Trade with CCI?
As a price momentum indicator, the Commodity Channel Index is primarily used by traders to detect the beginning and end of market trends. The CCI line falls between a channel of -100 to +100. When the CCI rises above the +100 level, that is considered a buy signal; hold the stock until it drops back below +100. Conversely, when the CCI drops below the -100 level, that is considered a sell signal; hold the stock until it rises back above the -100 level.
Aggressive traders may want to enter position as the index crosses the zero line instead of waiting for it to reach -100 or +100.
The Commodity Channel Index is also commonly used by channel traders who trade breakouts. Because this indicator picks tops and bottoms, when combined with a channel trading strategy, the CCI can help traders determine the change in price direction.