The Commodity Channel Index, or CCI, is an oscillator used in Technical Analysis to help determine when a market might possibly be overbought or oversold. The Commodity Channel Index was developed by Donald Lambert, and visually represents the relationship between market’s price, a moving average of the market's price, and the normal deviation for the market from that moving average. It is calculated by using the following mathematical formula:
CCI = (Price-MA)/(0.015xD)
The CCI, while originally used in the commodity futures markets, (hence the name) has seen its popularity among technical investors grow wildly; as traders often use the indicator in a manner that can help determine cyclical trends in currency markets as well.
The CCI is essentially a Secondary Indicator. In other words, it is most often used in conjunction with other indicators and oscillators, to determine and identify peaks and valleys in the market value and can provide traders with a valuable tool to spot changes in the direction of price movement on a chart.
The Commodity Channel Index can be used in a simple manner, as a break of the top value of the range in the indicator represents an overbought condition, and a break below the low value of the range shows an oversold condition. The indicator is adjustable, and many traders will simply adjust it in accordance to some kind of research they have done on market volatility in the particular market they are trading. (Currency or otherwise.) Quite often the CCI will be used with basic technical analysis in order to confirm a specific event, such as a trend line break or bounce.
When the break or bounce happens, although the chart can show what is going on, the CCI can help determine how reliable the price action is. For example, if you see an uptrend line get broken through, and the CCI is showing an overbought condition – this suggests that the market may be ripe for a fall. By using this indicator on top of your regular system, you can help smooth out some of the potential whipsaws that the market throws at you from time to time.
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