CCI - How Far from the Average
What is CCI
CCI stands for Commodity Channel Index. It was developed in 1980 by Donald Lambert to analyze cyclical movements in commodity markets. Despite having "commodity" in its name, it's actually a versatile indicator that can be used in all financial markets including stocks, forex, and cryptocurrencies.
The core concept of CCI is as follows:
CCI measures how far the current price has deviated from the statistical mean over a given period.
Simply put, it's an indicator that tells you numerically "how much higher or lower is the current price compared to normal?" A high CCI value means the price is significantly above its average, while a low value means it's significantly below.
Like RSI and Stochastic, it belongs to the momentum oscillator family, but has some unique characteristics.
CCI Calculation Principles
Let's look at the CCI calculation process step by step. You don't need to memorize the formulas, but understanding what each step means will help you use the indicator more effectively.
Step 1: Calculate Typical Price (TP)
Typical Price = (High + Low + Close) / 3
Rather than using just the closing price, it incorporates both high and low to get a representative price level for the period.
Step 2: Calculate Moving Average of Typical Price
Calculate the N-day (default 20 days) Simple Moving Average (SMA) of the typical price. This represents the "statistical mean."
Step 3: Calculate Mean Deviation
Calculate the average of the differences between each typical price and the moving average. This is similar to standard deviation but uses absolute values, making the calculation simpler.
Step 4: Calculate CCI Value
CCI = (Typical Price - SMA of Typical Price) / (0.015 x Mean Deviation)
The 0.015 is a constant set by Lambert to scale CCI values so that approximately 70-80% of them fall between +100 and -100.
Default Settings
| Setting | Default Value | Description |
|---|---|---|
| Period | 20 | Period for moving average and mean deviation calculation |
| Constant | 0.015 | Scaling coefficient |
Reducing the period (e.g., to 10) makes CCI more sensitive, while increasing it (e.g., to 40) makes it more stable.
How to Read CCI
The biggest characteristic of CCI is that its value range is unbounded. Unlike RSI which is fixed at 0-100, or Stochastic at 0-100, CCI can theoretically have any value. It can go to +200, +300, or even +500.
However, most of the time (about 70-80%), CCI moves between +100 and -100. Moving outside this range becomes a meaningful signal.
Key Thresholds
| CCI Zone | Meaning | Market State |
|---|---|---|
| Above +100 | Price significantly above average | Strong bullish momentum, possibly overbought |
| 0 to +100 | Price near to slightly above average | Weak bullish or neutral |
| 0 | Price equals the average | Centerline, pivot for direction changes |
| -100 to 0 | Price near to slightly below average | Weak bearish or neutral |
| Below -100 | Price significantly below average | Strong bearish momentum, possibly oversold |
CCI Trading Signals
The main trading signals from CCI can be categorized into three types.
1. +100/-100 Crossover Signals
Buy Signals:
- When CCI rises above -100 from below: Oversold condition resolving, potential bullish reversal
- When CCI breaks above +100: Strong bullish momentum starting, trend-following entry
Sell Signals:
- When CCI falls below +100 from above: Overbought condition resolving, potential bearish reversal
- When CCI breaks below -100: Strong bearish momentum starting, trend-following sell
Note that there are two interpretation approaches:
Counter-trend approach: Above +100 is overbought so sell, below -100 is oversold so buy Trend-following approach: Breaking above +100 signals strong uptrend so buy, breaking below -100 signals strong downtrend so sell
Which approach to apply depends on the current market's trend state. In ranging markets with low ADX, the counter-trend approach is more effective, while in trending markets with high ADX, the trend-following approach works better.
2. Zero Line Crossover Signals
When CCI crosses above 0, it indicates price has moved above the average, signaling a shift to bullish momentum; crossing below 0 signals a shift to bearish momentum.
This signal occurs more frequently than +100/-100 crossovers and has lower reliability, but it's useful for detecting early changes in trend.
3. CCI Divergence
Divergence between price and CCI serves as an early warning of trend reversal.
- Bullish Divergence: Price makes a lower low while CCI makes a higher low. This suggests bearish momentum is weakening.
- Bearish Divergence: Price makes a higher high while CCI makes a lower high. This suggests bullish momentum is weakening.
For more advanced content on divergence, see the Divergence Guide.
CCI vs RSI Comparison
CCI and RSI are both momentum oscillators, but they differ in measurement methods and characteristics.
| Comparison | CCI | RSI |
|---|---|---|
| What it measures | Deviation from mean | Ratio of gains to losses |
| Value range | Unbounded (infinite) | 0 - 100 (fixed) |
| Overbought threshold | Above +100 | Above 70 |
| Oversold threshold | Below -100 | Below 30 |
| Response speed | Fast | Relatively slow |
| Noise | Relatively high | Relatively low |
| Extreme value expression | Can grow infinitely, well expresses extreme situations | 100 is the ceiling, extreme situations compressed |
| Beginner suitability | Moderate | High |
CCI's advantage is having no value range limits. While RSI struggles to show significant differences between 90 and 99, CCI clearly distinguishes between +200 and +500. This allows it to better capture extreme market conditions.
On the other hand, RSI is easier for beginners to read. Moving within a fixed range of 0-100 makes it intuitive to understand.
Using CCI in Cryptocurrency Markets
Here are some useful points when using CCI in cryptocurrency markets.
Expand Thresholds Due to High Volatility
Cryptocurrencies are more volatile than traditional financial markets. Therefore, using only +100/-100 thresholds may generate too many signals. Some traders use +200/-200 as strong overbought/oversold thresholds for cryptocurrencies.
| Threshold | Traditional Markets | Cryptocurrency Markets |
|---|---|---|
| Weak overbought | +100 | +100 |
| Strong overbought | +200 | +200 to +300 |
| Weak oversold | -100 | -100 |
| Strong oversold | -200 | -200 to -300 |
Combine with Trend Filters
Rather than using CCI alone, it's important to first confirm trend direction. After identifying trend direction with moving averages, following only CCI signals in the same direction as the trend can improve win rates.
For example, if price is above the 50-day moving average (uptrend), only follow buy signals when CCI recovers from oversold, and ignore sell signals from overbought conditions.
Multi-Timeframe Analysis
Multi-timeframe analysis is effective: use CCI on larger timeframes (daily) to confirm overall momentum direction, then use smaller timeframes (4-hour, 1-hour) for entry timing.
Cautions When Using CCI
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Recognize the unbounded range: Just because CCI is at +150 doesn't mean it's "too high." In strong trends, it can go above +300. Focus on changes in CCI direction rather than absolute values.
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Avoid using alone: CCI tends to have more noise compared to other momentum indicators. It should be combined with other indicators like Bollinger Bands to check volatility conditions or MACD to confirm trend direction.
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Adjust period settings: The default 20 days isn't always optimal. For short-term trading, 14 days may work; for medium to long-term, 40 days can be adjusted according to your strategy.
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Switch interpretation based on trend state: In ranging markets, +100/-100 counter-trend trading is effective; in trending markets, +100/-100 breakouts should be used as trend-following signals. Develop the habit of first assessing market conditions.
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Confirm with volume: CCI signals that occur with high volume have greater reliability. Checking whether volume accompanies +100 breakouts or -100 breakdowns helps filter out false signals.
Next article: Bollinger Bands - Timing Trades with Volatility