The Commodity Channel Index (CCI) is a versatile momentum oscillator developed by Donald Lambert in 1980. Originally designed for commodities, CCI is now widely used across all markets including stocks, forex, and cryptocurrencies. It measures the current price level relative to an average price level over a given period, helping identify cyclical trends and potential reversals.
What is CCI?
CCI measures how far the current price has deviated from its statistical mean. Unlike RSI or Stochastic which are bounded between 0-100, CCI has no upper or lower limit, allowing it to better capture extreme market conditions.
Key concept: CCI tells you how unusual the current price is compared to recent history. A CCI of +200 means price is significantly higher than normal. A CCI of -200 means price is significantly lower than normal.
How CCI is Calculated
CCI uses the Typical Price and measures its deviation from a moving average:
- Typical Price (TP) = (High + Low + Close) / 3
- CCI = (TP - 20-period SMA of TP) / (0.015 x Mean Deviation)
The 0.015 constant ensures that approximately 70-80% of CCI values fall between -100 and +100.
CCI Levels and Interpretation
- Above +100: Overbought territory, strong bullish momentum
- Between +100 and -100: Normal price action, no strong trend
- Below -100: Oversold territory, strong bearish momentum
- Above +200 / Below -200: Extreme conditions, potential reversal
How to Use CCI
1. Overbought/Oversold Signals
The traditional approach to CCI trading:
- When CCI rises above +100 and then drops back below, consider selling
- When CCI falls below -100 and then rises back above, consider buying
CCI in Strong Trends
In strong uptrends, CCI can stay above +100 for extended periods. In strong downtrends, it can stay below -100. Do not blindly fade these signals without confirming the trend is weakening.
2. Zero Line Crossovers
- CCI crossing above zero: Bullish momentum building
- CCI crossing below zero: Bearish momentum building
Zero line crossovers can confirm trend direction.
3. CCI Divergence
Divergence between price and CCI can signal potential reversals:
- Bullish divergence: Price makes lower low, CCI makes higher low
- Bearish divergence: Price makes higher high, CCI makes lower high
Bullish Divergence Example
Stock drops from $50 to $45, CCI drops to -150.
Stock continues dropping to $42.
CCI only drops to -120 (higher than previous -150).
This bullish divergence suggests selling pressure is weakening.
CCI Trading Strategies
Trend Following Strategy
- When CCI crosses above +100, initiate long position
- Stay long as long as CCI remains above +100
- Exit when CCI crosses back below +100
- Reverse for short positions below -100
Mean Reversion Strategy
- Wait for CCI to reach extreme levels (above +200 or below -200)
- Look for reversal candlestick patterns
- Enter counter-trend when CCI starts moving back toward zero
- Use tight stop losses as you are trading against momentum
CCI with Moving Average
- Use a moving average to define the primary trend
- In uptrends (price above MA), only take CCI buy signals
- In downtrends (price below MA), only take CCI sell signals
- This filters out counter-trend signals
Combined Strategy Example
Stock is trading above its 50-day moving average (uptrend).
CCI drops to -120 (oversold in an uptrend).
CCI then crosses back above -100.
Buy signal: trend is up, CCI shows oversold bounce.
CCI Settings
- 20 period: Standard setting, most widely used
- 14 period: More sensitive, better for short-term trading
- 50 period: Smoother, better for identifying longer-term cycles
CCI vs Other Oscillators
CCI vs RSI
- CCI is unbounded; RSI is limited to 0-100
- CCI better captures extreme moves
- RSI is smoother and easier to read
- Both show overbought/oversold conditions
CCI vs Stochastic
- CCI measures deviation from mean; Stochastic measures position in range
- CCI has no bounds; Stochastic is 0-100
- CCI works well in trending markets
- Stochastic often better in ranging markets
Limitations of CCI
- Unbounded nature can make it harder to define exact overbought/oversold levels
- Can give many false signals in choppy markets
- Lagging indicator - signals come after price has already moved
- Works best when combined with other analysis methods
Best Practices for CCI Trading
- Always identify the primary trend before using CCI signals
- Wait for CCI to cross back through +100 or -100 for confirmation
- Use divergence signals for potential reversal warnings
- Combine CCI with support/resistance levels for stronger signals
- Adjust the period based on your trading timeframe
- Use proper risk management - CCI signals are not always accurate
Track Your CCI Trades
Pro Trader Dashboard helps you analyze which CCI setups work best and improve your trading performance over time.
Summary
The Commodity Channel Index (CCI) is a powerful momentum oscillator that measures how far price has deviated from its average. Key levels to watch are +100 and -100, with extreme readings above +200 or below -200 indicating potential reversals. CCI works well for trend following when price stays in overbought or oversold territory, and for mean reversion when extreme readings occur. Always combine CCI with trend analysis and other confirmation tools for the best results.
Learn more: RSI Indicator and Stochastic Oscillator.