CCI - What is it ?
The CCI (Commodity Channel Index) falls into the category of oscillators, was developed by Donald Lambert in the late 70's. It's a momentum-based tool used to identify conditions of being overbought or oversold (like the RSI does). Lambert intended for it to be used for commodity trading, but some traders use it for stocks and CFD's as well.
Indicators like the CCI and the RSI are oscillators; they tell you when the price of an asset has entered the overbought or oversold zones, as mentioned above.
The image above of the BMW stock (CFD) shows the CCI in action. The yellow circled area is the oversold area, and you can see the price bouncing back into a bullish trend (upward). The green circle shows the overbought zone, and you can see the trend going downwards again.
The CCI consists of two lines; the +100 and -100. An imaginary line in the middle can be taken as the 'zero line'. When the line crosses the +100 in an upward direction, we say that the asset is overbought. What this basically means is that the price has deviated so much from the average price, and that sooner or later it should bounce back down. When it crosses the -100 line from above, the asset price is well below the normal deviation. One can thus expect it to snap back up, into a bullish trend.
In the image above you can clearly see the +100 and -100 lines.
Whenever the CCI crosses into the overbought region, this usually signals the beginning of a bullish trend. It's always good practice to verify these signals with other indicators. Conversely, when it moves into the oversold region, a strong bearish trend is beginning. Once the CCI rises above the -100 (heading towards the 'zero line') most traders tend to close the trade.
Take a look at the PayPal chart below. It shows the CCI above the +100, and a strong corresponding uptrend.
As with all indicators, it's always a good idea to use the CCI in conjunction with another indicator. The list of other indicators can be found here.
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