Commodity Channel Index

The Commodity Channel Index measures the relationship of a security’s current price to its statistical average. Though the CCI appeared first in Commodity trading circles—the indicator was published first in Futures Magazine—the Commodity Channel Index is equally powerful for predicting stock, bond and currency movements as it is commodities.

The Commodity Channel Index is an oscillator, and thus shares some similiarities to other common indicators like the Relative Strength Index. Primarily, the CCI is used as a measure of overbought and oversold levels, or to define areas of divergence—areas where the price moves opposite of the indicator.

CCI Applications

Here are the two ways traders use the CCI to make forex trades:

1. CCI Overbought/Oversold – Using the CCI as an overbought or oversold indicator is as easy as reading the levels of the CCI. At -100 or below, the CCI is said to be oversold. Readings above +100 indicate that the currency is overbought.
2. CCI divergence – Divergence occurs when the CCI trends in the opposite direction of a currency pair. If the EURUSD, for example, is making new highs while the CCI is making new lows, the next movement should be down to follow the CCI. Similarly, if the CCI is making new highs while the Eurodollar makes new lows, the EURUSD should soon rise to follow the CCI.

The chart below shows the CCI as an oscillator and overbought or oversold indicator:

Using the Commodity Channel Index

The Commodity Channel Index indicator is best used in shorter time periods where the quick movements of the CCI do not overstate the movements in the currency pair.

Those who use the CCI in longer time periods may want to introduce more time periods to the calculation, or use overbought and oversold levels greater than 100 and less than 100. Though +200 and -200 are often thought to be the highest and lowest possible readings, the CCI could theoretically equal all values up to positive infinity, and all values down to negative infinity.

We recommend using a lower oversold number like -150 and an equally higher overbought number like +150.

You can add new overbought and oversold lines to the CCI by adding horizontal trendlines on the indicator in a forex platform like Metatrader 4.