Commodity Channel Index

The commodity channel index or CCI is a momentum indicator, originally introduced by Donald Lambert in 1980. It is a good indicator for spotting overbrought or oversold conditions, but can also be used as a trend indicator showing the beginning and end of a trend.

Since its introduction, the indicator has grown in popularity and is now a very common tool for traders, not only for currencies but also commodities and equities. Lambert,s trading guidelines for the CCI focused on movements above +100 and below -100 to generate buy and sell signals. Because about 70 to 80 per cent of the CCI values are between +100 and -100, a buy or sell signal will be in force only 20 to 30 cent of the time. When the CCI moves above +100, a security is considered to be entering into a strong uptrend and up buy signal is given. The position should be closed when the CCI moves back below +100. When the CCI moves Below -100, the security is considered to be in a strong downtrend and sell signal given. The position should be closed when the CCI moves back above -100.

Since Lambert's original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals.

CCI can be used to identify overbrought and oversold levels. A security would be deemed oversold when the CCI dips below -100 and overbrought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above -100. From Overbrought levels, a sell signal might be given when the CCI moves back below +100.

As with other indicators CCI should be used along side others and as part of are well tested trading strategy.

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