TheÂ **Commodity Channel Index (CCI)**Â is a technical indicatorÂ that measures the current price level relative to an average price level over a given period of time.

It was created byÂ Donald Lambert and originally designed to identify cyclical turns in commodities. The CCI is categorized as a momentum oscillator, whichÂ means that CCI is used to i**dentify overbought and oversold levels.**

The fundamental assumption behind the CCIÂ indicator is that commodities move in cycles, with highs and lows coming at periodic intervals.

The CCI indicatesÂ **when one of those cyclical reversals is imminent**.

While Lambert originally used CCI to trade commodities, the indicator is used across different assets nowadays.

**How CCI Works**

The Commodity Channel Index (CCI) measures the current price level relative to an average price level over a given period of time.

The CCI fluctuatesÂ **above and below zero.**

- CCI is relatively high when prices areÂ
**far above their average**. - CCI is relatively low when prices areÂ
**far below their average**.

Using this method, CCI can be used toÂ **identify overbought and oversold levels**.

The percentage of CCI values that fall**Â between +100 and -100**Â will depend on the number of periods used.

- AÂ
**shorter CCI**Â will be more volatile with a smaller percentage of values between +100 and -100. - The more periods used to calculate the CCI, the higher the percentage of values between +100 and -100.

Lambertâ€™s trading guidelines for the CCI focused on movementsÂ **above +100 and below -100**Â to generate buy and sell signals.

Because about 70 to 80 percent of the CCI values are between +100 and -100, a buy or sell signal will only generateÂ **20 to 30 percent of the time.**

**Buy Signal**

- When the CCI moves above +100, the price is considered to be entering into a strong uptrend and a buy signal is given.
- The position should be closed when the CCI moves back below +100.

**Sell Signal**

- When the CCI moves below -100, the price is considered to be in a strong downtrend and a sell signal is given.
- The position should be closed when the CCI moves back above -100.

**How to Use (CCI)**

The CCI is a versatile indicator and can be used in different ways.

**Overbought and Oversold Levels**

CCI is used to identify overbought and oversold levels.

- An asset is considered oversold when theÂ
**CCI falls below -100.** - From oversold levels, aÂ
**buy signa**l might be given when the CCI moves back above -100. - An asset is considered overbought when the
**Â CCI rises above +100**. - From overbought levels, aÂ
**sell signal**Â might be given when the CCI moved back below +100.

**CCI Divergence**

As with most oscillators, divergences between the indicator and the actual price action can also be applied to increase the strength of signals.

- AÂ
**positive divergence below -100**Â would increase the strength of a signal based on a move back above -100. - AÂ
**negative divergence above +100**Â would increase the strength of a signal based on a move back below +100.

**CCI Trend Line Breaks**

Trend line breaks can be used to generate signals. Trend lines can be drawn connecting the peaks and troughs.

- From oversold levels, anÂ
**advance above -100 and trend line breakou**t is considered bullish. - From overbought levels, aÂ
**decline below +100 and a trend line break**Â is consideredÂ bearish.

Traders use the CCI to help identify price reversals, price extremes, and trend strength.

As with most technical indicators, the CCI should be used in conjunction with other forms of technical analysis.

**Calculation**

The proper calculation of the CCI requires several steps.

They are listed in the proper sequence below.

You must first compute the typical price, using the high, low, and close for the interval. It is the simple arithmetic average of the three values.

The formula is:

TP = (High + Low + Close) / 3

**TP**Â represents the typical price.**High**Â is the highest price for this interval.**Low**Â is the lowest price for this interval.**Close**Â is the closing price for this interval.

Next, you calculate a simple moving average of the typical price for the number of periods specified.

TPAVG = (TP1 + TP2 +... + TPn) / n

**TPAVG**Â is the moving average of the typical price.**TP**Â is the typical price for the nth interval.**n**Â is the number of intervals for the average.

The next step is rather complex; it computes the mean deviation. The formula is:

MD = (|TP1 - TPAVG1| +... + | TPn - TPAVGn |) / n

**MDÂ**is the mean deviation for this interval.**TPn**Â is the typical price for the nth interval.**TPAVGn**Â is the moving average of the typical price for the nth interval.**n**Â is the number of intervals.

The symbol | | designates absolute value. In mathematical terms, negative differences are treated as positive values. Now, the computation for the final CCI value is:

CCI= (TPt - TPAVGt) / (.015 * MDT)

**CCI**Â is the Commodity Channel Index for the current period.**TPt**Â is the typical price for the current period.**TPAVGt**Â is the moving average of the typical price.**.015**Â is a constant.**MDT**Â is the mean deviation for this period.

For scaling purposes, Lambert set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and +100.

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