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    Commodity Channel Index (CCI)

    Definition

    The Commodity Channel Index (CCI) is an oscillator that gives you a sense of the market's momentum by gauging how quickly prices are changing. It calculates the "typical price" of an asset by averaging its high, low, and close prices. Then it measures how much this typical price deviates from a moving average. The CCI swings above and below zero, and you can use +100 and -100 as default threshold values to identify overbought or oversold conditions.

    Suggested Trading Use

    Here are some ways you can utilize the CCI in your trading:

  • Identify Overbought or Oversold Conditions: If the CCI crosses above +100, it often suggests the asset might be overbought and due for a pullback. Conversely, when the CCI goes below -100, it could mean the asset is oversold and may be ready for a rebound.
  • Confirm Momentum: You can use the CCI to confirm the strength of a trend. In an uptrend, you'd generally want the CCI to stay above zero as a sign of strength.
  • Spot Divergence: If you notice the CCI moving in the opposite direction of the asset’s price, it could signal a potential reversal. For example, if the price is making higher highs, but the CCI is making lower highs, it could hint at a forthcoming price drop.
  • Time Your Entries and Exits: The CCI can help you decide when to get into or out of trades. A good buying opportunity may present itself when the CCI crosses above the -100 line from below. Similarly, you might consider selling when the CCI crosses below the +100 line from above.
  • Gauge Volatility: Although the CCI is mainly a momentum indicator, its wide and rapid swings can also signal increased volatility. You might see these erratic moves as warning signs, especially when the CCI oscillates rapidly between extreme levels.