The Commodity Channel Index (CCI) is an Oscillator originally developed by Donald Lambert. Since then the indicator has grown in popularity and is now very common tool for traders to identify cyclical trends not only in commodities but also equities and Currencies.
The CCI was developed to determine overbought and oversold levels. The CCI does this by measuring the relation between price and a moving average (MA), or more specifically, normal deviations from that average.
CCI is calculated as follows..,
CCI = (Typical Price- Simple Moving Average)/(0.015* Mean Deviation)
The one prerequisite to calculating the CCI is determining a time interval, which plays a key role in enhancing the accuracy of the CCI.
When the Curve in CCI goes below -100, buy signal is generated and when it goes above +100, sell signal is generated.
Trend line breaks can be used to generate signals. Trend lines can be drawn connecting the peaks and troughs. From oversold levels, an advance above -100 and trend line breakout could be considered bullish. From overbought levels, a decline below +100 and a trend line break could be considered bearish.
