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The Commodity Channel Index is Underappreciated.

The Commodity Channel Index (CCI) is included on every trading platform, but it gets overshadowed by other indicators, more specifically - oscillators, which have a similar appearance.  The Commodity Channel Index provides some interesting opportunities to take advantage of extreme levels on the oscillator.  Find out more about this underrated gem of an indicator that can be used both on its own and as a filter for entries.

What is the Commodity Channel Index (CCI)?

The Commodity Channel Index is an indicator that measures variation from the mean, which is in the typical case - Simple Moving Average.  This index takes the difference between the Typical Price and the Simple Moving Average of the Typical Prices and then divides this figure by the Mean Absolute Deviation of the Typical Price.

However, this is not what you came for.  You came here to find out how to use the Commodity Channel Index.

In the above image is the Commodity Channel Index for a period of 14 Hours (it is on an Hourly Chart), notice how the CCI has levels of 100, -100, and 0.  These are important levels in determining bullish and bearishness along with oversold and overbought conditions.

A currency pair is overbought when the CCI is above 100 and is oversold when it is below -100.  A cross above the zero line is a bullish move while a cross below the zero is a bearish move.

Now onto a few featured strategies for you to automate and test for yourself...

Strategy #1:  The EMACCI Strategy

  • Timeframes:  1 Hour and 4 Hour
  • Indicators:  CCI with a Period of 14, EMA 40, EMA 80
  • Long Entry:  CCI crosses above the Zero Line, EMA 40 is above EMA 80, High of Previous Candle is below EMA 40
  • Short Entry:  CCI crosses below the Zero Line, EMA 40 is below EMA 80, Low of Previous Candle is above EMA 40
  • Long Exit:  CCI is 100.
  • Short Exit:  CCI is -100.
  • Stop Loss:  20 pips.

 

Strategy #2:  MACD + CCI + ADX

Indicators: MACD (12, 26, 2), ADX 12 period and CCI 14 period.

Time frame: 4 hours.

Currency Pair:  EURUSD

Rather than put out the rules, here's how the entry was coded.

Long Exit Rule:  MACD goes below CCI.

Short Exit Rule:  MACD goes above CCI.

 

Strategy #3:  CCI with a Mixed Blend of Support/Resistance

Timeframe:  1 Hour

Indicators Used:  CCI of 20, Pivot Points, ADX of 14.

Long Entry:

  • Rising above CCI Level of -200.
  • High of previous candle is less than the Pivot Point.
  • Previous candle is bullish.
  • Previous candle is not in any Supply or Demand Zone.
  • ADX is between 20 and 40.

Short Entry:

  • Falling below CCI Level of 200.
  • Low of previous candle is higher than the Pivot Point.
  • Previous candle is bearish.
  • Previous candle is not in any Supply or Demand Zone.
  • ADX is between 20 and 40.

Long Exit:  CCI reaches 100.

Short Exit:  CCI reaches -100.

EURUSD

AUDUSD

Conclusions about the Commodity Channel Index (CCI)

This is an indicator with a lot of potential and it is worthy for traders to put in the time testing different strategies through automated backtests.  Including CCI in your code for the purposes of entries and exits can help you avoid oversold and overbought conditions.  This is an indicator that plays well with others and by itself.

To get a better understanding of backtesting, check out our article on backtesting.