In the last article on trading training we teach you what is the parabolic SAR indicator and how we can use it for our daily operations. As you can see, during these last few weeks we have been focusing on showing you indicators that allow us to measure the power of the bulls and bears and, in turn, the entry or exit points in an operation. And since we don't want to lose good habits, in today's trading training we are going to talk about the CCI indicator and how we can use it in our daily operations.
What is the CCI indicator?路
Let's start the trading training by explaining what this indicator is about. The CCI, which stands for Commodity Channel Index In English, it is an indicator of the oscillator family. Its creator is Donald Lambert, writer of the book 'Commodities Channel Index: Tools for Trading Cyclical Trends' published in 1980. This indicator is very useful in asset classes that have cyclical behaviors. This indicator may have some similarity to the RSI/Stochastic RSI, one of the indicators that we have taught in previous installments of the trading training series. Its usefulness lies in measuring the difference between the price change of an asset compared to its average price change.
How is the CCI indicator measured?
Let's now see how this indicator is measured to understand in depth how it works. As we have commented in the previous paragraph of this trading training, the CCI bears a certain similarity to the RSI/Stochastic RSI indicator.
It consists of a moving average (usually 14 periods with HLC parameters) that acts as an oscillator together with two very important lines; one located at +100 and the other at -100. At the same time, it also has a line that separates the positive and negative ranges, which determine whether the asset in question is overbought or oversold.
How is the CCI calculated?燐
The CCI is calculated using a simple formula that is applied to the periods that are determined. With the result of this calculation we obtain the value of the CCI. The calculation formula is made up of:
- Current typical price, formed by a sum of the closing price, maximum price and minimum price divided by 3.
- Moving Average of Typical Price for (X): A moving average of typical prices over the last (X) periods.
- Deviation from the mean of (X): standard deviation of the last (X) periods.
- Value 0,015: This is a value established by Donald Lambert himself so that 70-80% of the indicator values range between +100 and -100.
How can we take advantage of the CCI for our trading training?
Now that we have seen what this indicator is, how it is measured and its calculation formula, let's follow the trading training to see how to interpret it. As we have mentioned, the indicator is an oscillator, but at the same time it can help us identify trends. Firstly, it will help us to identify moments of overbought or oversold of the asset in question. In my case, I establish the +100 levels as green (overbought), the 0 level as yellow (neutral point) and the -100 level as red (oversold). This way it is more visually comfortable:
As we have mentioned previously, the zero level can also help us determine if the asset in question is in an uptrend (above zero) or in a bearish trend (below the zero level). Therefore, the further the asset is from said level, the stronger the movement will be. We must also look at whether we find any type of divergence present between the values of the CCI indicator and the price action, since they can indicate trend reversals.
Conclusions from this trading training on the CCI indicator.
After concluding this trading training on the CCI indicator, let's review the most important points to take into account. This indicator, as we mentioned at the beginning, is suitable for cyclical asset classes, since it makes it easier to read. At the same time, we have learned the formula with which the parameters of the indicator are calculated and how we can use the indicator to capture signals to enter the market safely. As a personal recommendation I have told you about the change of colors of the most important values (+100/0/-100) and, above all, if you are going to use the indicator in Tradingview you must access the indicator configuration to change the length of the indicator from 20 to 14 and make sure that the data source is based on the values cited in the formula (hlc 3).