Type of Indicators in Technical Analysis – The Commodity Channel Index (CCI)
The Commodity Channel Index (CCI) is developed by Donald Lambert in 1980, which is an indicator used to identify a new trend, price extremes and trend strength in trading commodities. Presently, the CCI has grown to be used and applied to indices, ETFs, stocks as well as other securities such as currencies.
Similar to the Relative Strength Index (RSI), the CCI is also a momentum oscillator, which is used to identify overbought or oversold levels.
There are two levels in which the CCI uses:
- The +100 Level
- The -100 Level
The majority of CCI movement occurs between the +100 and the -100 level. Readings above the +100 level indicates an overbought condition and if the CCI crosses below the -100 level, it indicates an oversold condition.
A move that exceeds any of these levels shows an unusual strength or weakness of the market prices, thus being able to forecast the direction of a trend.
In the illustration above, you can see that the price trend correlates when the CCI either touches the +100 or -100 levels.
Once the CCI rises above the +100 level, it is a signal that the market will tend to be bullish; therefore traders will enter in a long position.
If the CCI dips below the -100 level, it is a signal that the market will tend to be bearish, thus, traders will enter into a short position.
Because CCI is a leading indicator, it is a preferred indicator by traders to identify bullish or bearish runs as well as key trend reversals.
Other Indicators in Technical Analysis:
- Average True Range (ATR)
- Bollinger Bands
- William %R
- Moving Average Convergence Divergence (MACD)
- Relative Strength Index (RSI)
- Fibonacci Fan
- Moving Averages
- Retracements and Trend Reversal
- Support and Resistance
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