The CCI (Commodity channel index) indicator measures the current price level to an average price over a given period.

Developed by Donald Lambert, the CCI is a momentum oscillator that you can use to identify trend continuation and reversal. It oscillates below and above the zero level.

The majority of CCI movement occurs between -100 and +100. If the CCI signal line goes above or below this level, it indicates overbought and oversold levels.

## Formula

The formula for the CCI indicator is

*CCI = (Typical Price – MA) / (.015 x Mean Deviation)*

Where:

Typical Price (TP) = (High + Low + Close)/3

MA = Moving Average

Constant = .015

## Calculations

To calculate the CCI, you need to follow certain steps.

- Firstly, you need to determine the period. 20 is the most common period, but you can set it according to your trading strategies.
- Make a spreadsheet to find the typical price and find the high, low, and close of the 20 periods.
- Add the last 20 typical prices to locate the MA and divide it by 20.
- The mean division value involves subtracting the MA from the typical price of the last 20 periods. Then, add the absolute values of these numbers and then divide by 20.
- After finding all the values, add them to the formula mentioned above.

Here’s one thing you need to remember. Lambert set the constant at .015 so that 70 to 80% of CCI values range between -100 and +100. However, it depends on the period too.

A shorter period will be prone to volatility and would range between -100 and +100 in a small percentage. On the flip side, if you are using a longer period, there is a high chance of values falling between -100 and +100.

## Best settings for the CCI indicator

The best settings for the indicator are:

The length, by default, is set at 20. You can set the higher period. As mentioned above, a higher period gives a better probability of values falling between -100 and +100.

The MA method is SMA, but you can change it to your preference.

The timeframe should be higher, as CCI is prone to false signals on the lower timeframes.

## How to trade with the CCI indicator?

You can trade with the indicator using multiple ways; locating trend direction, finding overbought and oversold levels, and identifying divergences.

When the CCI moves above +100, it signals a potential uptrend. When this happens, you can take long positions or exit short ones.

On the flip side, if the CCI moves below -100, it starts a downtrend. Here, you can enter short or exit long positions.

You can look for overbought levels when the indicator goes above +100 and oversold levels when the CCI goes below -100.

You have to remember that CCI is an unbound indicator, which means it has no upsides or downsides. So, you have to add another indicator to confirm overbought/oversold levels.

You can also find divergences with the CCI. If the price makes a new high/low and the CCI moves oppositely, it suggests a trend reversal.

While divergence may not be a good trading signal with the CCI since it may continue for a long time and does not necessarily result in a price reversal, it can be useful for you to know about the upcoming reversal.

So, you can leave the trade or may tighten your stop-losses.

## Advantages of the CCI indicator

- The indicator tells about the trend continuation and reversal.
- Interpreting the indicator is relatively easy.

## CCI vs Stochastics indicator

CCI and stochastics are momentum oscillators, and both tell overbought/oversold levels.

However, Stochastics oscillates between 0 and 100, while the CCI is unbounded.

Also, CCI and Stochastics may identify overbought and oversold levels differently because of their calculations.

## Summary

The commodity channel index is an oscillator that identifies overbought/oversold levels to tell the direction of the trend.

-100 and +100 are the important levels you have to look for when trading with the indicator. A CCI value above +100 indicates an overbought level, while a reading less than -100 indicates an oversold level.

Many traders use the CCI along with other indicators for further signal confirmation.