By David S Adams – I thought I might begin a series of articles on some of the indicators I find helpful in my trading, so the Commodity Channel Index (CCI) seemed a logical place to start. The CCI can be a little tricky to use, but there are countless systems in which the CCI is an integral component. A simple search on Google will turn up a plethora of CCI related trading systems.
A little history first:
The CCI is an indicator developed in 1980 by Donald Lambert and was used as a momentum indicator for use in commodities trading. It can be utilized as an oscilllator or trend indicator depending upon your inclination, which makes the CCI among the most versatile indicators in use. Based on a simple moving average, the CCI incorporates a standard deviation equation and smoothing factor to arrive at the CCI line product. Usually the +100 and -100 lines, along with the zero line are plotted when using the indicator.
How to use the CCI:
As a trader interested in chaos theory, it is my belief that investors love to “jump on the ship” whenever a market move of any significant move begins to develop, and will continue to pile buy or sell short well past the overbought and oversold thresholds the CCI plots, which are the previously mentioned +100 and -100 lines. In my world of thinking, I love to take advantage of this overbuying and overselling and find very nice trades as the CCI line pierces the 100 lines, either up or down, and end up taking advantage of this tendency to overbuy and oversell.
On the other hand, I also use the CCI as a trend indicator and will sell when the CCI passes down through the +100 and buy when the CCI passed upward through the -100 line. I consider most of the action between the 100 lines as market noise and tend to ignore most trade indicators in those areas. I am looking for the overbought and oversold conditions, and initial trend indications.
Like most traders I use a cross checking system to validate my CCI entries and the MACD is an excellent choice for this job, as well the as the commercially sold software system Decision Bar. I am one who likes agreement in trade entries and never rely on a single indicator to enter or exit any of my trades.
One caveat I always make known to traders regarding the CCI is angle at which the CCI pierces the 100 lines. I am always very wary of entries when the CCI lines has been hanging around the 100 lines for several bars, or approaches the 100 lines and repeatedly stops. Which is not to say that when it eventually pierces the line, which it may, you can’t have a good trade, but my experience has told me that these types of entries are often unproductive unless accompanied by strong support indicators. I like a nice clean entry past the 100 line. I would imagine many traders might not agree with this “angled” view on trade entry, but my experience has not been good when the CCI line dilly-dallies around the 100 lines for any period of time without piercing them.
In summary, the CCI is a versatile indicator that can be used on far more than it’s original commodity based origin. It works well with financial indexes, to say the least.
About the Author
I write mainly about financial topics, specifically daytrading the emini contract, and many of my more technical techniques can be found at my blog, The Fractal Futures Trader.
