The Commodity Channel Index is among the best technical analysis indicators and it is one of the most important tools used in FXLORDS’ Forex Trading Signals and Managed Forex Accounts. Commodity Channel Index (CCI) shows the relationship between the price of a particular financial instrument, the moving average of this price and the level of price deviation from this average. High values of the index indicate that prices are unusually high compared to the average, while low values of the index indicate that prices are low. Despite its name, you can apply the CCI on any financial instrument, not just commodities.
The index is calculated by finding the difference between the price of a particular financial instrument and its Simple Moving Average (SMA) and then dividing it by the absolute Standard Deviation of the price.
There are several ways to use the Commodity Channel indicator (CCI):
- Deviations — they appear when the price reaches a new top; while the CCI is unable to exceed the previous top. Normally, this is the classic case to signal a correction in the price.
- Over Bought or Sold — Commodity Channel Index (CCI) usually moves in the range of -100 and +100. When the indicator exceeds these values, it indicates over bought or over sold conditions, and consequently, increases the likelihood of a correction in the price, that’s why the Commodity Channel indicator (CCI) helps determine price trend reversal zones.
- The CCI also shows the strength of the price trend; when the indicator moves away from the zero value, it means increasing the power of the price trend; whether it’s upwards or downwards.
The CCI is usually used with other technical indicators and when done, the rules mentioned above become more credible and useful. For example, using the CCI with the RSI can point out over bought and over sold situations easily, and using the CCI with the Moving Average will make it easier to show deviations.