18/05/2022
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The Commodity Channel Index (CCI) measures the current price level relative to an average price level over a given period. CCI is relatively high (+100) when prices are far above their average. CCI is relatively low (-100) when prices are far below their average. Using this method, CCI can be used to identify overbought and oversold levels. CCI is generally more susceptible to showing divergences in comparison to RSI.
With a constant of 0.015 which allows for 70-80% of all CCI values to fall within the +100 to -100 range. CCI is calculated by determining the difference in average price (High, low and close) and the simple moving average (20 period) of this price. This value is divided by the standard deviation of price to the moving average. The standard deviation is combined
CCI = (AveP - SMA_of_AveP) / (0.015 * Mean Deviation)
Using the CCI โ
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Divergence occurs when the highs or lows of price are diverging in structure to the highs or lows of the oscillator. Itโs important to remember that Bullish divergence always deals with price and oscillator lows, while bearish divergence always deals with price and oscillator highs There are 4 different kinds of divergence:
Bullish Divergence (reversal): Price is Putting in Lower Lows while the oscillator is putting it Higher Lows. This can often precede a market reversal, as is demonstrates the price low is losing momentum.
Bearish Divergence (Reversal): Price is putting it Higher Highs while the oscillator is putting in Lower highs. This is the same as bullish divergence but reversed.
Hidden Bullish Divergence (Continuation of trend): Price is putting in Higher Lows while the oscillator is putting in Lower Lows. This can often be a good buying opportunity in a strong trending market, as it highlights a time in the trend where price is oversold.
Hidden Bearish Divergence (Continuation of trend): Price is putting in Lower Highs while the oscillator is putting in Higher Highs. This often represents a good shorting opportunity in a strong down trending market as it highlights a time in the trend where the price was overbought.
Itโs important to note that relying primarily on divergence to pick trend reversals is an express ticket to the poor house, strong trending markets will often show divergences 2-3 times before actually reversing. Include conclusions drawn from the CCI indicator in conjunction with other trade indications.
