Commodity Channel Index

The Commodity Channel Index (also called CCI) is a banded oscillator that ranges from 100 to -100 and centers around zero. When used in its original design, Long positions are taken in assets over 100. Short positions are taken in assets under -100. The default length setting for the Commodity Channel Index is 20 periods. Lower settings increase the sensitivity and false signals, higher settings reduce sensitivity and false signals.

The alternate use for the Commodity Channel Index is viewing assets as overbought or oversold. In that usage, assets over 100 are overbought. Assets below 100 are oversold.

Divergences are also easily drawn and spotted using the Commodity Channel Index. A bearish divergence is formed by a peak inside the CCI overbought zone, followed by lower successive peaks in the CCI, while price action peaks moves higher. The divergence is completed when price action begins moving lower than prior price action peaks. At that point traders can consider short selling positions in anticipation of a price drop.

A bullish divergence is formed by a trough inside the CCI oversold zone, followed by higher successive troughs in the CCI, while price action troughs continue to form lower than prior troughs. The divergence is completed when price action begins to move above prior price action troughs. Only after that should traders consider getting buying long positions.