The CCI oscillator developed by Donald Lambert is a versatile and widely used indicator in technical analysis which helps in identifying overbought and oversold conditions and reversals and divergences.
It also helps in taking momentum based trades.
In momentum-based trading, traders mostly focus on stocks that are giving significant move in one direction on high volume.
Momentum-based traders may hold their positions on varying time frames including several minutes, few hours or even the full trading day, based on how quickly the stock moves in case of directional change.
How to trade using CCI (Commodity Channel Index)?
In a strongly up trending market, a Commodity Channel Index move above 100 is considered to be an entry point for a momentum trader from bullish side.
Once entered, his exit will be triggered when CCI moves below 0 level.
In the following daily chart of ICICI bank, we see many such examples where this strategy could generate a substantial profit.
Similarly, in a down-trending market, Commodity Channel Index moving below -100 is considered as a sell signal and the exit for this short position is triggered by a move back of CCI above 0 level.
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The following daily chart of Sun Pharma shows many such short (someone could primarily look at short trades as we could see the trend was broadly down, indicated by the downward slope of the 100 dma) trades with only one of them failing (indicated in red) during the timeframe under consideration.
The very fact that CCI has been used by the traders so long signals its importance in the trader’s community.
However, unlike other oscillators, one should use CCI in conjunction with price or other indicators rather than looking on a standalone basis.
Here we have seen just one use of CCI but we can use CCI in many other ways to plan and execute our trade.
We can get better and more confirmed trades by combining it with price data and other relevant indicators.