Commodity Channel Index: Applying CCI Indicator’s Momentum to Crypto

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Buying and selling cryptocurrencies in a challenging, volatile environment becomes easier when using technical indicators. These indicators can help crypto traders make better trading decisions because they give an unbiased view of the underlying coin.

The secret to using indicators to understand price movements is to keep it simple. One effective tool to use is the commodity channel index indicator, which helps give you an overview of what the price is doing. It’s one of the profitable momentum-based indicators that shows potential price reversal points, including the trend’s strength. 

Making trades using the CCI indicator requires an understanding of how it works, along with practical trading knowledge. We’ll explain how the CCI indicator works in the cryptocurrency market, and how to build a profitable trading strategy by combining the CCI oscillator with other indicators. 

What Is the Commodity Channel Index Indicator? 

The CCI indicator is an analytical tool used to find possible oversold and overbought levels of a trading instrument. In addition, investors can use it to find the strength of a trend in order to find potential buying and selling opportunities.

The CCI indicator was developed by technical analyst Donald Lambert in 1980. It was intended to find the average mean price over a specific time. While creating this indicator, Lambert considered using it in the commodity market. Its use is still applicable in modern cryptocurrency trading.

The CCI indicator’s value is higher when price moves above the average for a particular time. As a result, the market trend is then considered stronger. On the other hand, if the CCI is lower and the price is below the average level, we can consider the current trend as weak.

Let’s see how trend strength and weakness are indicated in the price chart below:

The CCI indicator considers several elements in its calculation method. For a 20 period CCI, the calculating method is as follows:

  • Typical price (TP) = (high + low + close) ÷ 3 
  • CCI = (Typical price − 20 period simple moving average, or SMA, of TP) ÷ (0.015 × mean deviation)

In this calculation, the value of 0.015 is a constant defined by the creator of this tool. The use of this constant value keeps the majority of CCI values oscillating within the +100 to −100 range.

The SMA is calculated by adding together the 20 previous typical prices, and dividing by 20.

CCI Indicator: Strengths and Weaknesses

Ultimately, success in technical analysis depends on how a trader utilizes the tools at their disposal. 

CCI Indicator: Strengths

  • The CCI Indicator gives insight into the market’s momentum.
  • It also works as a tool to confirm trend reversals.
  • The CCI indicator is easy to combine with other technical indicators to fine-tune trading decisions.
  • It forms divergences that help traders find reversal points.

CCI Indicator: Weaknesses

  • As the CCI indicator is an unbound oscillator, overbought and oversold levels need additional confirmation.
  • Traders shouldn’t buy or sell a crypto asset based solely on signals provided by the CCI.
  • There’s no way to determine the invalidation level of a trade using the CCI indicator.
  • The CCI indicator might not work well during a market crash.

How to Trade with the CCI Indicator

The primary way to trade using the CCI indicator is to find the overbought and oversold zones of a range-bound market to open a buy position from low and sell from high.

CCI Trend Continuation Trade

Ideally, the price has a higher possibility of decreasing during an overbought market scenario. On the other hand, in an oversold state, a price increase is highly probable. In that case, traders can take long positions when the CCI indicator is above 100. Similarly, they can close their existing buying positions if the CCI level moves to 200, an extremely bullish position.

The daily BTC/USD chart above shows how the bullish trend becomes stronger when the CCI indicator moves above 100. Later on, the bullish trend extends for more than a month, and reverses when the CCI level reaches the extreme of 200.

CCI Range Trading

In a range-bound market, a CCI indicator level of 100 is considered an overbought zone, while −100 indicates a solidly oversold zone. Therefore, traders should mark the top and bottom of a range and find the CCI level in that area to find their trading opportunities.

The above image shows how overbought and oversold indications work in a range-bound market. If traders can use CCI levels to take advantage of the major market trend, it’s more likely to result in profits.

CCI Divergence Trading

The price of a trading instrument moves like a zigzag, with the formation of swing highs and swing lows. Indicators from the momentum class usually follow those swing levels, but in the case of a divergence, investors might find the price moving in one direction and the indicator in another. This is a strong sign of a price reversal, in which investors can easily open buy or sell trades using the CCI divergence.

The above intraday BTC/USDT chart shows the price making a new lower low, indicating bearish pressure. Meanwhile, the CCI indicator fails to create a new low and instead forms a higher low. As a result, the price moves up from that swing, indicating a trend change.

CCI vs. Other Oscillating Indicators

When using technical analysis, traders need broad knowledge about how some top-tiered indicators work in order to find the best one. The CCI indicator can be profitable for cryptocurrency trading, but this doesn’t mean that all traders should start using it right now. The ultimate goal is to build a good trading strategy — and in order to do that, basic knowledge of all top-tiered indicators is mandatory.

CCI vs. RSI

The Relative Strength Index (RSI) indicator is the average price of up and down closes for a specific time, generally 14 days. This indicator is shown in a separate window and moves from 0 to 100, where a level above 70 is overbought, and below 30 is oversold.

Both the CCI and RSI are momentum oscillators, and they can produce bullish and bearish divergences which occur when new peaks and valleys in the price charts move in different directions from the indicators. These divergences show strong trend reversal signals in which the RSI is more reliable than the CCI indicator, due to its effectiveness and simplicity.

CCI vs. Stochastic Oscillator

The stochastic oscillator is another indicator from the momentum class that compares the particular closing of a trading asset over a certain period. It’s a range-bound indicator that moves from 0 to 100. Any reading over 80 is considered overbought, and below 20 oversold The stochastic oscillator can signal reversals by forming a divergence with the price. The most prominent weakness of this indicator is that it can produce false reversal signals during a strong trend.

Both the CCI indicator and stochastic oscillator can generate bullish and bearish signals, with the CCI being more price-sensitive. Therefore, traders with two or more confirmations might obtain more reliable signals from the CCI indicator.

CCI vs. MACD

MACD (or moving average convergence divergence) is a momentum indicator that moves in vertical lines below and above the neutral (zero) line. It includes an exponential moving average (EMA) that tracks the most recent price changes. MACD is more complex than other momentum-based indicators, and can produce the most accurate regular divergences. Additionally, traders can anticipate the trend’s strength by looking at how MACD histograms emerge above or below the neutral line.

The above image shows the MACD histogram moving above the zero line while the CCI is above 100. As a result, the price feels a strong bullish pressure and moves up, creating a new higher high.

Best Commodity Channel Index Indicator Pairings

In technical analysis, using two or more indicators is the basic way to find a reliable price direction. Unfortunately, indicators lag to some degree, and are based on fixed calculations. Therefore, relying on a single indicator means looking at the chart from only one side. Successful traders combine two or more indicators, which lets them see the price from at least two different angles.

CCI and Fibonacci Retracement

Fibonacci numbers and CCI indicators are both advanced trading tools that many expert traders include in their arsenals. The CCI indicator shows the overbought and oversold conditions, with a possible price reversal point. On the other hand, Fibonacci retracement can indicate the best suitable buying point for a crypto asset. Among different Fibonacci retracement numbers, 38.2%, 50.0% and 61.8% are most effective. 

In this trading method, investors join a trend after completing the initial swing. After making a new high, the price should come closer, with any bullish rejection from 38.2%, 50.0% or 61.8% considered a potential buying point. Meanwhile, the CCI indicator should remain in the oversold zone, working as an additional confirmation to the buying trade.

Let’s see how the Fibonacci retracement and CCI indicators can work together in the cryptocurrency market:

The above 4-hour intraday ADA/USD chart shows the existing bullish trend retracing lower to the 61.8% Fibonacci retracement level and forming a bullish reversal candlestick pattern. Meanwhile, the CCI indicator remains at the oversold level, pointing out a bullish reversal in the price.

CCI and OBV

On-balance volume (OBV) measures the accumulation and distribution phases of a trend using volume and price movements. If the current day’s closing price is above the previous one’s, the day’s volume is added to the OBV calculator. On the other hand, if the current closing price is below the last day’s closing price, the volume is deducted from the OBV.

Some key features:

  • If the OBV is moving up, the price is in an accumulation phase. Similarly, if the OBV is moving down, the price is in a distribution phase.
  • If the price is dropping, but volume is moving up, it might create bullish OBV divergence. This indicates that the cumulative volume is increasing over the previous day’s, and the price is likely to change direction.

Let’s look at how to buy a crypto asset combining CCI and OBV:

  • Find a scenario where the price is dropping, and OBV is moving up.
  • The price forms a bullish reversal candlestick formation after the bullish divergence.
  • The CCI indicator has remained at the oversold zone and moved up.

In the 4-hour ETH/USD intraday chart above, the price makes a new low, but OBV forms a new high, which is a strong sign of divergence. After that, a bullish reversal candlestick pattern forms while the CCI remains in the oversold zone. As a result, the price moves higher with an impulsive bullish pressure and initiates a bullish trend.

CCI and Parabolic SAR

Parabolic SAR is a trend-following indicator that moves with the price in the main window. It is represented as a series of dots below or above the price that works as a dynamic support or resistance level. This indicator is suitable for finding the most recent price reversal zones, which makes it effective for intraday trading. 

The CCI indicator and parabolic SAR work well for both scalping and day trading, where investors should match the market direction with the overall trend. In that case, another indicator, the dynamic 20 EMA, complements this strategy perfectly. If the price moves below the 20 EMA, the market direction will be bearish, and above the 20 EMA will be bullish.

Let’s see how to make a buy trade using both the CCI indicator and parabolic SAR:

  • The price is moving up where the price and parabolic SAR are above the dynamic 20 EMA.
  • The price moves lower and forms a bullish reversal candlestick from the parabolic SAR.
  • Meanwhile, the CCI indicator remains above 100, indicating that the existing trend is strong.

The above image shows how the price and parabolic “dot” move above the dynamic 20 EMA. The buy trade is valid on the closing candle, where the dot appears above the EMA. Meanwhile, the CCI indicator is above 100, which is a sign of a strong trend. The bullish possibility is valid as long as the price remains above the most recent swing low.

The Bottom Line

The commodity channel index indicator is an effective technical tool for finding the overbought and oversold areas on a trading chart. Additionally, investors can use it to find bullish and bearish divergences where the current trend may lose momentum.

However, like other technical indicators, it has some drawbacks. It does a relatively poor job of finding the tops and bottoms of a trend. Therefore, the best approach is to use it as a significant trend continuation tool, where trading entries come after a minor correction. In addition, using the CCI indicator in conjunction with other analytical tools is recommended.

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