The Commodity Channel Index (CCI) is a technical indicator that is used to identify overbought and oversold conditions in a security. It was developed by Donald Lambert in the early 1980s and is typically used in the commodity and currency markets, but can also be applied to other markets.
The CCI is calculated by taking the difference between the security's typical price (the average of the high, low, and close) and its moving average, and then dividing that difference by the mean absolute deviation (MAD) of the typical price. The result is then multiplied by a constant factor, typically 0.015.
A CCI reading above +100 suggests that the security is overbought, while a reading below -100 suggests that the security is oversold. A reading between +100 and -100 suggests that the security is in neutral territory.
The CCI can be used in several ways to generate trading signals. One of the most common ways is to look for crossovers of the +100 and -100 lines. When the CCI crosses above +100, it generates a sell signal, and when the CCI crosses below -100, it generates a buy signal.
Another way to use the CCI is to look for divergences between the CCI and price action. When the CCI is making new highs while price is failing to do so, it can be a bearish divergence and a warning of a potential trend reversal. Similarly, when the CCI is making new lows while price is failing to do so, it can be a bullish divergence and a warning of a potential trend reversal.
It's important to note that the CCI is a momentum indicator and it's a lagging indicator, which means that it is based on past price data and may not always provide accurate predictions about future price movements. As with any indicator, it is best to use the CCI in conjunction with other indicators and analysis techniques to confirm signals and get a better understanding of the market conditions.
Keep in mind that the Commodity Channel Index (CCI) is a technical indicator that is used to identify overbought and oversold conditions in a security, it's calculated by taking the difference between the security's typical price (the average of the high, low, and close) and its moving average, and then dividing that difference by the mean absolute deviation (MAD) of the typical price, it's important to use it in conjunction with other indicators and analysis techniques to get a better understanding of the market conditions.