CCI: how far has the price moved from its average?
The Commodity Channel Index (CCI) measures how far the price has moved from its 20-bar average, relative to its usual deviation. Above +100 means unusually strong price, below -100 means unusually weak price.
In the panel below the chart above, you see a line oscillating around zero: this is the CCI. The panel has two horizontal lines at +100 and -100 levels. Unlike the RSI, the CCI does not have a ceiling or a floor; the line can go up to +200, or even higher.
The question the CCI asks is: how far is the price currently from its average, and is this distance normal? First, the average price (the average of high, low, and close) is calculated. Then, the difference between this price and its 20-bar average is taken. This difference is divided by the price's usual deviation around its average. The result: how extreme the price is relative to its own normal.
The CCI spends most of its time between -100 and +100; the constant in the formula is chosen for this purpose. Outside this range is unusual. Above +100 indicates that the price has moved significantly above its average; this is sometimes overbought, and sometimes the beginning of a strong trend. Below -100 is either oversold or the beginning of a strong decline.
To distinguish between these two interpretations, context is important. In a sideways market, the CCI turning up from below -100 is used as a sign that the price will return to its average. At the beginning of a trend, the CCI breaking above +100 indicates the strength of a new move. The same indicator has two different uses, and the presence of a trend determines which one is valid.
The CCI can also show divergence: if the price makes a new low while the CCI makes a higher low, the momentum of the decline is decreasing.
How to read it
- Read the range between -100 and +100 as the normal zone, and outside it as the unusual zone.
- In a sideways market, watch for a turn up from below -100 as a sign of a return to the average.
- In a trending market, interpret a break above +100 as the strength of a new move.
- Before deciding which interpretation is valid, check for the presence of a trend.
In this state right now
Liquid symbols where the CCI is below -100 on the daily chart and has started to turn up compared to the previous day.
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Trap
Since the CCI has no limits, the idea of 'it has fallen too much, it will turn now' is even more dangerous here: the CCI can go down to -200, -300. Entering the oversold region is not enough for a reversal; one must at least wait for the line to turn up. The second trap is reading the same signal the same way in every market: above +100 indicates strength in a trending market, but an extreme in a sideways market.
Tip
Among the scans, there is a scan that finds symbols where the CCI has turned up from oversold. When you open the symbol you found, first look at the direction of the trend: an oversold reversal when the main trend is up is more significant than when the main trend is down.
Glossary
- CCI
- Commodity Channel Index; an unlimited oscillator that measures the distance of the price from its average relative to its usual deviation.
- Normal zone
- The range of the CCI between -100 and +100; the normal oscillation area of the price.
- Return to average
- The tendency of prices that move to extremes to return to their average over time.
- Average price
- The average of a bar's high, low, and close prices.
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