CCI

Overview

The Commodity Channel Index (CCI) is a momentum-based oscillator used to help determine when an investment vehicle is reaching a condition of being overbought or oversold. It is also used to assess price trend direction and strength.

Interpretation

The CCI is interpreted as follows:

• A CCI value above +100 can signify the start of an uptrend while a value below -100 can signify a downtrend.

• When the CCI moves from negative or near-zero territory to above +100, it could mean the price is starting a new upward trend.

• When the CCI moves from positive or near-zero territory to below -100, it could mean the price is starting a new downward trend.

Indicator Triggers:

The CCI indicator uses only basic general triggers: Cross level, In zone, Sustain level.

Notes

1. Mean Reversion Strategy

Identify Overbought and Oversold Conditions:

• The CCI can signal overbought conditions when the value is above +100 and oversold conditions when it is below -100.

• Strategy: When the CCI crosses above +100, consider it as a potential overbought signal and look for short-selling opportunities. Conversely, when it crosses below -100, consider it as a potential oversold signal and look for buying opportunities.

• Confirmation: Always use additional confirmation from other indicators or price action patterns to avoid false signals. For example, combining CCI with RSI (Relative Strength Index) can provide more reliable entry and exit points.

2. Trend Following Strategy

Detecting Trend Strength and Direction:

• The CCI can also be used to identify the strength and direction of a price trend. When the CCI is above +100, it indicates a strong uptrend; when it is below -100, it indicates a strong downtrend.

• Strategy: In a strong uptrend (CCI > +100), consider entering long positions or adding to existing ones. In a strong downtrend (CCI < -100), consider entering short positions or adding to existing ones. You can combine this indicator with an EMA or VWAP to confirm the trend.

• Trailing Stop: Use a trailing stop loss to protect profits as the trend continues. Adjust the stop loss according to the CCI's movement to ensure you are not exiting prematurely.

3. Divergence Strategy

Spotting Potential Reversals:

• Divergence between the CCI and price action can signal potential reversals. Bullish divergence occurs when prices are making lower lows while the CCI is making higher lows. Bearish divergence occurs when prices are making higher highs while the CCI is making lower highs.

• Strategy: Look for bullish divergence as a signal to enter long positions and bearish divergence as a signal to enter short positions.

• Entry and Exit: Confirm divergence signals with other technical indicators like MACD (Moving Average Convergence Divergence) or stochastic oscillators. This can enhance the reliability of the trade setup.