Technical analysis is an important method for market investment. After mastering the basic knowledge of candlestick charts and moving averages, we need some indicators to help us judge market trends and price movements. The Commodity Channel Index (CCI) is highly regarded among investors for its simplicity, ease of use, and high sensitivity.

Introduction

The Commodity Channel Index (CCI), also known as the trend indicator, is one of the most commonly used technical reference indicators for measuring whether market prices have exceeded the normal distribution range. It is a unique indicator among overbought/oversold indicators based on statistical principles and was introduced by American stock market technical analyst Donald Lambert in the 1980s. The CCI emphasizes the importance of the mean absolute deviation in technical analysis and is widely used in various asset trading.

Unlike other overbought/oversold indicators such as KDJ and RSI, which have a boundary of 0-100, the CCI value fluctuates between positive and negative infinity and does not need to be centered around 0. This means that the indicator does not become less useful in the indicator dulling phenomenon, where there may be sudden and large price changes in the short term. As a result, the CCI can help investors to better assess the market situation, especially during non-normal market conditions.

Why does the CCI value fluctuate between negative and positive infinity? This is related to its calculation method：

The calculation formula for CCI includes several variables: N is the calculation period, TP is the typical price, MA is the average price, MD is the mean deviation, and 0.015 is a constant.

TP = (Highest Price + Lowest Price + Closing Price) ÷ 3

MA = Sum of the Closing Prices over the Last N Days ÷ N

MD = Sum of the Absolute Differences between MA and Closing Prices over the Last N Days ÷ N

The numerator of the formula represents the deviation between the price and the moving average during the given period, while the denominator (MD * 0.015) represents the mean deviation. The ratio of the two indicates the magnitude of the current deviation relative to the average deviation. When the value fluctuates between -100 and +100, it indicates that the price is in a range-bound market and is not significant as a reference. However, when the value exceeds +100 or falls below -100, it suggests that the current price deviation is significant and deserves attention. By combining it with other indicators, investors can make informed investment plans.

How to use CCI on a trading platform?

To set the CCI indicator on the Gate.io PC platform, navigate to the professional version of the market interface, select the “technical indicators” icon on the left side, and enter “CCI” in the search bar on the pop-up window. Click on it to add it to the chart, and it will be displayed in the sub-window.

The indicator is set to a default length of 20 but can be adjusted based on personal trading style. Shorter periods make the indicator more responsive to short-term changes but also generate more noise, while longer periods result in lower sensitivity but reduce the number of false signals.

From the chart, as shown below, CCI is a fluctuating line with an upper limit and a lower limit of -100 and +100, respectively. There are no boundaries for the upper and lower limits.

Basic usage

When the CCI line is above +100, it indicates that the market price is in a strong area, while when it is below -100, it indicates that the market price is in a weak area.

Buy Signals:

1. When the CCI line rises above -100 after previously being below it, and continues to rise, it suggests that the price may have exited the weak zone and formed a buying signal, as seen in point 1 on the BTC price chart for a 15-minute timeframe on February 7, 2023. BTC rose from 22,690 to 22,870 after this buy signal was formed.

2. Additionally, when the CCI curve rises above the +100 line and enters a range that is significantly different from its average, it indicates that the price has entered a strong state and forms a buying signal, as shown in point 2 of the chart.

Sell Signals:

1. When the CCI indicator line falls below -100 after being above it and continues to fall, it suggests that the price may have left the strong zone and formed a selling signal, as shown in point 3 of the BTC price chart on a daily timeframe from November to December 2021. BTC fell from 65,000 to around 56,000 after this selling signal was formed.

2. When the CCI curve falls below the -100 line and enters a range that is significantly different from its average, it indicates that the price has entered a weak state and forms a selling signal, as shown in point 4 of the chart. After this selling signal was formed, BTC fell from 56,700 to around 42,600.

Special Uses

CCI divergence refers to the situation where the direction of the CCI line is exactly opposite to that of the candlestick chart. CCI divergence is divided into two types: top divergence and bullish divergence.

Bullish divergence

Bullish divergence in CCI refers to the situation where the CCI curve stabilizes and forms a series of higher lows at a low position, far below the -100 line on the candlestick chart, while the price trend on the chart continues to decline, forming a series of lower lows. This phenomenon is usually interpreted as a short-term buying signal, indicating that the price may rebound in the near future. For instance, on February 7, 2023, on the BTC price chart in a 15-minute timeframe, as BTC dropped from 22,975 to 22,653, the price trended lower, but the CCI indicator’s bottom rose, indicating bottom divergence. As a result, the BTC price rallied from 22,653 to 23,041.

Top divergence

When the CCI curve is at a high position far above the +100 line and the price on the candlestick chart continues to form a series of higher highs, the CCI curve forms a series of lower highs instead, which is called top divergence. Top divergence usually indicates a signal of an upcoming reversal in the high position, indicating that the stock price is likely to decline in the short term, which is a selling signal.

For example, in the ETH price chart on a daily timeframe from July to September 2022, ETH rose from 1602 to 2003 from July 18 to August 13. However, the two high points of the CCI were decreasing, forming top divergence. Subsequently, ETH began to decline for half a month and hit a low of 1435.

Conclusion

The CCI indicator is simple and easy to use, with high sensitivity which makes it convenient for developing trading plans. Compared to other overbought/oversold indicators like RSI and KDJ, CCI doesn’t experience dulling, so it can be used for more accurate judgments when RSI and KDJ become dull. When CCI runs in the range of -100 to +100, it’s best to use other indicators alongside it.

Overall, it’s important to combine the use of indicators with the analysis of candlestick patterns and other commonly used indicators. Relying solely on one indicator will result in a lower success rate in investing. This article introduced the basics of the CCI indicator, but a deeper understanding of its meaning is necessary to better utilize its advantages. In the investment process, it’s also necessary to discover the best ways to use the indicator through practice and observation, forming your own investment system, and making targeted investments.