Commodity Channel Index indicator (CCI) was introduced by Donal Lambert. CCI measures the variations of the price of a stock with respect to its statistical mean. Contrary to the meaning derived from its name, the CCI works well with any stock or index. High values of CCI show that the stock price is high compared to the average price and low values mean that the stock price is well below the average price. Zerodha Kite and other trading platforms like Upstox Pro etc display the CCI indicator accurately.
Commodity Channel Index FAQ
The Commodity Channel Index indicator can be used in various way. We can use it as a trend following indicator. Many traders use the zero line cross as a trade trigger. They buy when the CCI indicator crosses above zero and short sells when it crosses below zero. We can also use CCI as a counter-trend indicator. This indicator can also be used for divergence detection.
The full form of CCI is Commodity Channel Index.
Few traders create fresh buy once CCI goes up after moving off from the oversold zone. Other traders use zero line cross over as a trading signal. They buy when the CCI indicator crosses above zero line from below.
The CCI is a much faster indicator. That means it can generate buy or sell signals earlier than RSI. If we trade on the basis of overbought and oversold zones and buy when the indicator comes out of oversold zone and short sell when the indicator comes out of overbought zone, the difference is visible. The check in the image below 20-period CCI gives many more signals where the RSI not giving a single signal.
CCI measures the variations of the price of a stock or index or commodity with respect to its statistical mean. The CCI indicates start of a fresh trend or sometimes also indicates end of a trend.
CCI Indicator Formula:
How to set up the Commodity Channel Index on the charts?
- First lets see how we can attach the indicator on the Zerodha Kite.
- Open your MarketWatch and select your stock.
- Open the chart of the stock and from the Studies section select Commodity Channel Index and click on it.
- Once we select the parameters, the indicator is plotted on stocks price.
The default parameter of the Commodity Channel Index is 20-period. The default plot colow is white for the indicator. You can select whether to show the overbought and oversold zones. The default overbought zone is +100 and the default oversold zone is -100.
In the same way, you can also attach the CCI indicator on charts of Upstox Pro. The default parameters are same and the indicator is ditto to the Zerodha platform look.
How to trade CCI Indicator?
#1 Simple trading system
- In the Commodity Channel Index, an overbought zone is denoted by +100 and oversold zone is denoted by -100.
- Create a short selling position when CCI starts coming down after reaching overbought zone.
- Exit from the short position and create a fresh buy position once CCI goes up after moving off from the oversold zone.
#2 Trading the CCI Indicator divergence
Many traders also trade the divergence in the Commodity Channel Index indicator. When the price is in an uptrend and price is making higher highs, if the Commodity Channel Index does not follow the price and makes a lower high it is a negative divergence. It indicates the uptrend can take a hault. Similarly, when the price is in a downtrend and price is maqking lower lows, if the CCI Indicator bucks the trend and makes higher low, it is a positive divergence. This indicates the downtrend can end soon.
#3 The Woodie CCI
Another classic usage of the CCI indicator is in the Woodies CCI trading system developed by Ken Wood. This system used two combinations of the Commodity Channel Index. The first indicator used in this system is a 6-period CCI indicator, also known as the turbo or TCCI. The other is a 14-period CCI indicator, also known as Woodie or WCCI. Now Woodie has developed and identified few patterns those those we can identify using this combination of CCIs and are tradable.
#4 Swing trading with the 4-period Commodity Channel Index
A shorter version of the indicator can be used for short term swing trading entries. We can create both long and short positions using this strategy. Use a 4-period verion of the Commodity Channel Index. Buy when the CCI(4) moves below -100. Cover long when the indicator crosses above 0 or +50. Short sell when the CCI(4) crosses above +100. Cover the short position when the indicator crosses below 0 or -50. This strategy can be fine tuned using a 200-day simple moving average as in the RSI-2 strategy.
I suggest to go through the following book to master the Woodie CCI system. The name of the book is WWC Professional Trading System for E-mini S&P 500 Futures: WOODIE CCI and william R line.
The CCI is a very versatile indicator and is a powerful indicator like the RSI or Relative Strength Index. We can trade this indicator in various ways. The trading strategies involve the overbought oversold strategy, divergence and Woodie CCI techniques. In general, the CCI is a very important indicator and both intraday, as well as swing traders. Serious traders and technical analysts must have an idea on this simple yet powerful indicator.