Commodity Channel Index (CCI)
CCI (Commodity Channel Index), Commodity Channel Index was developed by Donald Lambert in 1980 for commodity markets. It is used to find out if the price is above, below and how far from its simple average and to predict the behavior of price movements. Lambert determined that prices moved with 11-days rising and 11-days falling in a 22-day period, so he decided to use the indicator for 11 days. It is also frequently used for 14 days. However, it is not recommended to be used outside the 5-25 days range.
CCI movement oscillates between +100 and -100 values. The region between the zero line and the +100 line is called the positive zone, and the region between the zero line and the -100 line is called the negative zone. The region above the +100 line is the overbought region, and the region below the -100 line is the oversold region. In these regions, the current trend is expected to end and change direction. CCI usually moves between -100 and +100.
When the CCI value rises above the +100 line, it is interpreted that the prices are too high in the overbought region and selling will begin. Therefore, buying in this region is risky. If the CCI crosses the +100 line in the overbought zone, it is a possible sell signal for investors.
When the CCI value falls below the -100 line, it is interpreted that the prices are very low in the oversold region and buying will begin. Therefore, selling in this region is risky. If the CCI crosses the -100 line up in the oversold region, this is a possible buy signal for traders.
If the CCI crosses above the zero line , it is considered a buy signal for these investors, and if it crosses below the zero line , it is considered a sell signal for the investors.
If price movements and CCI do not move in harmony, "divergence" occurs. Investors can take advantage of this mismatch to predict the direction of the trade. In other words, if the CCI movement is decreasing while the price is rising, or if the CCI movement is increasing while the price is decreasing, a mismatch is detected. Mismatches between CCI and price movements are interpreted as the trend will soon change in the direction of CCI movement. If price decreases while CCI increases, prices are expected to increase. If price increases while CCI decreases, prices are expected to decrease. Investors can take advantage of this mismatch to predict the direction of the trade.