The Commodity Channel Index (CCI) is an oscillator developed by Donald Lambert, measuring the current price level relative to an average price level over a given time. When price level is above average price, CCI is relatively high, vice versa. Therefore, we can identify overbought and oversold levels using this method.
The CCI is calculated by determining the difference between the mean price of an asset and the average of the means over a chosen time period.
CCI = (AveP – SMA_of_AveP) / (0.015 * Mean Deviation)
AveP = Average Price = (High + Low + Close) / 3 (Also known as the Typical Price)
The 0.015 constant ensures 70 to 80 percent of CCI values fall between +100 and -100.
When CCI exceeds 100, it indicates a coming strong uptrend, signaling a buy. When CCP falls below −100, it indicates a coming strong downtrend, signaling a sell. Traders can also apply trending indicators or other technical analysis methods to confirm signals indicated by the CCI.