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Commodity Channel Index
Description:
The Commodity Channel Index (CCI), which is best used with
contracts that display cyclical or seasonal
characteristics, is formulated to detect the beginning and
ending of these cycles by incorporating a moving average
together with a divisor which reflects both possible and
actual trading ranges. The final index measures the
deviation from normal, which indicates major changes in
market trend.
Conventional Analysis:
The CCI is designed so that 70% - 80% of all price
fluctuations fall between +100 and -100. When the CCI
exceeds +100, you establish a long position; when it falls
below -100, you go short. At what point above +100 you go
long, or below -100 you go short, is your decision based
on particular market analysis. For example, you may decide
that -125 suggests going short, while a rise to -75
suggests liquidating a short position.
Note: Many traders use this indicator in the exact
opposite way. They use it as an overbought/oversold
indicator with +100 or greater indicating that the market
is overbought, and -100 or less indicating that the market
is oversold.
Additional Analysis:
CCI often misses the early part of a new move because of
the large amount of time spent out of the market in the
center neutral region (between +100 and -100).
Interpreting signals when CCI crosses zero, rather than
waiting for CCI to cross out of the neutral region can
often help overcome this. For example, CCI crossing zero
from negative territory to positive territory would be
considered a bullish signal.
Similarly, CCI moving from positive to negative territory
would be considered a bearish signal. In addition, it may
be advantageous to exit positions before CCI actually
crosses zero. Using one method, early exit signals can be
interpreted when CCI reverses direction for 2 or more
bars.
Additional References:
Lambert, Donald R. "Commodities Channel Index: Tools for
Trading Cyclic Trends," Technical Analysis of Stocks
and Commodities magazine. July/August, 1983.
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