# Commodity Channel Index – An oscillator tool for high profit trading

Stock trading does require skill to study charts, price pattern and volume indicators but all such things can make the trade-in favour of trader if he/she can find the oversold /overbought signals to enter and exit in a trade at the right time for the maximum returns.

Do we have such tools? Of course, yes. This tool category is name as oscillators which can indicate the overbought and oversold signals.

As such there are several types of oscillators such as MACD, RSI, Mcclellan, etc but there is one oscillator known as Commodity Channel Index which has grown in popularity since it’s an introduction in 1980. It was introduced by Donald Lambert who believed that every commodity or stock moves in cycles with an establishment of high and low points within a fixed period. Due to its capability, CCI is now a very common tool fortraders to identify the cyclical trends in commodities, equities and currenciesThe Commodity Channel Index (CCI) measures the current price relative to the average price over a defined period; it comes under the category of unbound oscillators because there is no upper and lower limit on the relative price difference between current and average price over a defined period. It helps to identify the price reversals, price extremes and trend strength

Do you know CCI can also calculate by using formula
CCI = (Typical Price – 20-period SMA of TP) / (.015 x Mean Deviation)
where , Typical Price (TP) = (High + Low + Close)/3
Constant = .015
The reason to set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and +100
Don’t worry , most of the trading platform has this facility to see the CCI in respect to price and volume movement.
The CCI oscillates between +100 and  -100 range under normal condition but if crosses +100 then it implies an overbought condition, while readings below −100 imply an oversold condition.

The effective way to understand the overbought and oversold condition is to consider a period for short term and long term. Here, we consider 20days for the short term and 100 days for the long term. Please note , shorter periods are more volatile in comparison to longer periods but it is important to consider both for averaging /smoothing of the trends. We already understand that a reading above +100 is the overbought condition and reading below -100 is oversold condition. If 20days snd 100 days CCI crossing high or low reading at the same time then it is a signal to enter or exit in the market respectively.

CCI results are more reliable when combined with other pattern/tools. I find candlestick patterns and CCI are a complement to each other for the effective results to trade for high returns.

However, CCI helpful to highlight aspects of price action that might not be readily visible on the chart but it cannot generate consistent, winning trades alone.