What is a Commodity Channel Index pattern?

What is the Commodity Channel Index indicator?

The Commodity Channel Index (CCI) indicator measures an asset’s current price compared to the average price level established over a given period. It tracks the momentum of current price highs and lows relative to the statistical mean to determine the development of new trends in the market.

When the CCI is higher compared to the historical average, it indicates that the asset price is above the mean level. Conversely, if it’s low, the price will be below the average observed over a certain period.

Note that despite the name, the CCI can be used as an indicator for any market. You can also use it to get exposure to shares, forex and other markets with us.

The CCI was created by Donald Lambert, a renowned technical analyst who first made his work public in 1980 in Commodities magazine, now known as Futures.

He initially developed the index to identify long-term cycles in commodity markets but has since been used by traders that have a short-term outlook on different securities.

What pattern does the Commodity Channel Index identify?

The CCI identifies a pattern that indicates an opportunity for traders and investors to take a position. Looking at price charts, you’ll use it to identify price divergence – overbought or oversold levels – in an asset, reversals to the mean and trend indicators that display a particular pattern.

Technical analysts use the CCI to spot different harmonic patterns in price fluctuations that help to determine the entry and exit points when trading.

Additionally, the CCI enables you to track momentum shifts in different directions and volume indicators over a given period to determine if a pattern is developing.

What does the Commodity Channel Index tell traders?

The Commodity Channel Index tells traders the start of an upswing or downswing in the price level of an asset to spot emerging cyclical trends. This is achieved through comparing the current price to the historical average price over a given timeline.

Typically, the index price will fluctuate over and below the zero level, indicating movement towards a positive or negative trajectory. Since 70% to 80% of the CCI values fall between +100 and −100, it means only around 20% to 30% of the values will fall outside the range that’ll signal an opportunity to buy or sell a market.

When the CCI moves above +100, the financial instrument’s level will signal an upward trend and provide an opportunity for traders to buy at a given time. Conversely, when the CCI moves below −100, a downturn in the level of the asset’s price will be observed and there’ll be a signal to sell.

How is the CCI indicator calculated?

The CCI indicator is calculated using the typical price and its simple moving average, divided by the mean price over a given period. The calculation compares the difference between the mean price of a security and the average price level over a particular timeframe.

Lambert set the constant at 0.015 for scaling purposes, so that roughly 70% to 80% of CCI values would fall between −100 and +100. You multiply the constant and the mean deviation so that the outcome is readable.

How to use Commodity Channel Index in trading

You’ll use the Commodity Channel Index to spot new trends that develop in a market. Depending on the period you input, you’ll be able to determine the level of volatility in a market at a given time.

For example, a shorter CCI will be more volatile with a smaller percentage of values between +100 and -100. Conversely, a longer CCI will have a higher percentage of values between +100 and -100.

How do you use the Commodity Channel Index when day trading?

The CCI is a useful indicator when day trading to determine how volatile a market is before you can get exposure intra-day. You can track the average price changes of the market in shorter timeframes to spot emerging trends, pick up pullbacks in the price level, and determine entry and exit points within the same day.

Day traders monitor charts with different candlestick patterns, looking for opportunities to buy and sell financial instruments within a single day – closing out positions at the end of each day.

Since daily chart patterns will support someone with a short-term outlook, you’ll take a long position (buy) if the CCI values hit below –100 and rally back above –100. You’ll earn a profit if the market has an upswing, and conversely, get a loss if it continues to drop.

Note that, because daily charts are so volatile, it’s important to exit your position once the CCI value moves above +100, before it dips again. You’ll have to be quick since only 20% or 30% of the values fall outside –100 and +100.

There are different day trading strategies that you can use to take your position, including scalping, money flows, mean reversion, swing and trend trading.

Learn more about the ins and outs of day trading

How do you use the Commodity Channel Index when trading forex?

The Commodity Channel Index indicator can be useful when trading forex to identify whether a currency pair is overbought or oversold over a specific period. Additionally, you can use the indicator to spot the strength or weakness of the trend in the market traded.

You’ll monitor the CCI in relation to the performance of a certain currency against another over a given period to identify if there’s a pattern of observed momentum in a particular cycle. Once you spot the level that signals the direction that the market will take, you’ll open your position accordingly.

Learn more about forex trading

How do you use the Commodity Channel Index when trading commodities?

When you want to take a position on a commodity, you can use the indicator to determine short- or long-term trends.

Since commodities can be affected by seasonal cycles and weather patterns – which can be predicted to an extent – you check the level the current price deviates from the average mean to determine the direction that the market will take.

You can study the overbought and oversold levels of different commodities to take a position on the spot (cash) price, futures or options.

Find out what commodity trading is

With us, you’ll speculate using CFDs. These derivatives are leveraged, which means you only need to put up a fraction of the full value of the position to get exposure.

Note that both your profit and loss will be calculated using the full position size, not just your initial deposit. You’ll need to take steps to manage your risk effectively.

Here are a few steps you’ll take to open your position with us:

1. Log in to your trading account
2. Search the asset you want to trade in the finder panel
3. Input your position size
4. Choose ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade

You can practice using the CCI Indicator and place trades on our risk-free demo account. This tool simulates the market environment in real time, giving you full functionality of our platform, including all of our technical indicators. Once you’ve built up your confidence in using the indicator, you can open a live account and start trading using real money.

Commodity Channel Index (CCI) vs Relative Strength Index (RSI)

While the CCI is an indicator used to determine conditions that give rise to the market being overbought or oversold, you can use another tool to track the momentum in the direction that the market is going.

The Relative Strength Index (RSI) is a different technical indicator that measures the speed and fluctuations of an asset's price movements. The RSI values range from 0 to 100, with an uptrend (low RSI) crossing the 70 mark signalling an opportunity to short, while crossing the 30 mark threshold (high RSI) indicating a long trade.

You can use both indicators interchangeably since they’re momentum oscillators. This means that you can identify patterns of emerging trends or price divergences that can offer opportunities to take a position.

Commodity Channel Index summed up

• The Commodity Channel Index (CCI) measures the asset's price in comparison to the average price level established over a given period
• The CCI can help traders identify the overbought or oversold levels in a market and signal an opportunity to take a position
• Traders use the CCI to indicate new trends emerging in several securities as well as different timeframes
• With us, you’ll use CFDs to take a position on different markets using the CCI indicator
• The difference between the CCI and the RSI is that one tracks the deviation of the current price from the moving average price level and another monitors the speed of the price changes to identify overbought and oversold conditions