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Channel Commodity Index (CCI)
The next technical indicator we will learn in this unit is ‘Channel Commodity Index’ (CCI).
The CCI indicator (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 moves in one direction on high volumes.
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.
CCI is a versatile momentum oscillator developed by Donald Lambert that can be used to identify overbought (+100) / oversold (-100) levels or trend reversals
CCI = (Typical Price-20 period SMA of typical price)/ (.015*mean deviation)
Where, typical price= (High + Low + Close)/ 3m and 0.015 is used as a constant. Basically the constant of 0.015 makes sure that 70- 80 percent of CCI values fall between -100 and + 100.
How to trade using CCI?
The CCI can be either used as a coincident or leading indicator. As a coincident indicator any move after 100 indicates strong price uptrend and beginning of uptrend.
While any move to -100 suggests weakness and beginning of a downtrend. The trend line break of the CCI is also keenly observed by the traders.
However, as a leading indicator trader also uses to find bullish and bearish divergence to identify overbought and oversold position and reversal in trends.
CCI mainly moves between the range of -100 and 100.
One should enter the stock when this indicator crosses 100, it indicates a buy signal and exit the stock when this indicator crosses -100, as it indicates a sell signal.