Momentum oscillators are an essential group of indicators for technical analysis and crypto price prediction in general. The Commodity Channel Index is one such indicator, and even though it isn’t very popular, it’s still one of the best oscillators in the market today.
That’s why we’ll cover this complex oscillator in this article, its importance, and some of the best indicators to pair it with. Let’s dive in.
What is The Commodity Channel Index (CCI)
The Commodity Channel Index or CCI is a technical indicator that helps you identify when a cryptocurrency’s price is approaching oversold and overbought conditions. Like most other oscillators, it evaluates the speed and strength of a token’s price movement. So, it can tell when trends are weakening, especially with divergence.
The CCI was developed in 1980 by Donald Lambert to help traders determine proper exit and entry points using a unique formula that provides insights into how strongly a bullish or bearish price trend is moving. It measures an asset’s price deviation from its statistical mean over a specified period.
As a momentum indicator or oscillator, the CCI is based on the principle that a cryptocurrency’s price moves in cycles. So, there will be periods when a particular trading sentiment will inflate or deflate a token’s value, either buying or selling. And when it eventually fades, the price will adjust by engaging in a trend reversal.
The Commodity Channel Index is used for different trading timeframes, but the 20-period timeframe is the most common, as day traders use it. This is usually called CCI-20.
In addition, 50 and 100 periods are also standard timeframes if you’re looking to adopt long-term periods.
Unlike other oscillators like the RSI and the Stochastic Oscillator, the CCI’s values aren’t bound between 0 and 100. However, values below -100 are considered oversold, and those above +100 are overbought.
As with most other indicators, the CCI isn’t perfect and isn’t designed to be a one-size-fits-all technical analysis tool, unlike Crypticorn’s Price Prediction Dashboard. One of its major flaws is that it’s a lagging indicator, this means that it sends signals about trends that have already begun and may have possibly ended. So, by the time you’re done calculating the CCI, the trend reversal you’re looking to take advantage of may have already been completed.
Furthermore, not all the signals the Commodity Channel Index provides follow through, which could lead to you losing your trading funds. This is why it’s best to pair it with other indicators for thorough analysis and signal generation.
How is CCI Calculated?
The CCI has a rather complicated formula.
It’s calculated thus:
CCI = (Typical Price – SMA) / (0.015 * Average Mean Deviation).
Let’s get each parameter here:
- Calculate the Typical Price: The typical price for each period is calculated as the average of the high, low, and close prices:
Typical Price = (High + Low + Close) / 3
- Calculate the Simple Moving Average (SMA) of the Typical Prices: Sum up the typical prices over the specified period and divide by the number of periods; we commonly use 20 periods to calculate the SMA.
- Calculate the Mean Deviation: For each period, calculate the absolute deviation of the typical price from the SMA:
Mean Deviation = |Typical Price – SMA|
- Calculate the Average Mean Deviation: Sum up the mean deviations over the specified period and divide by the number of periods (20) to calculate the average mean deviation.
- Calculate the Commodity Channel Index: Finally, calculate the CCI using the formula:
CCI = (Typical Price – SMA) / (0.015 * Average Mean Deviation).
Calculating CCI values can be strenuous work. You’ll need to compile the opening and closing prices of 20 periods before you even begin making calculations that must be precise. Regardless, when it comes to crypto price prediction it’s worth it, as this indicator provides valuable insights into market movements that other oscillators may miss.
What Do CCI Values Mean?
Generally, values above +100 mean that the cryptocurrency being analyzed has been overbought, and a trend reversal is in order. Simply put, it signals to sell as buying momentum has been significantly exhausted.
On the other hand, when the CCI value is below -100, a cryptocurrency or DeFi asset is typically considered oversold. Buying momentum may soon overcome the current market trend, which makes for a decent buy signal.
However, since the CCI is unbound, these limits don’t always apply to all cryptocurrencies.
For instance, some price trends may reverse at higher and lower values, such as +200 and -125. Sometimes, you may have to look deeply into the indicator’s previous readings to see where the price reversed.
Divergence could also occur, and using a lagging indicator like the CCI, you may only sometimes spot it on time.
Importance of CCI in Crypto Price Prediction
The Commodity Channel Index is helpful in crypto price prediction for the following reasons.
Identifying overbought and oversold conditions
The CCI is primarily used for identifying overbought and oversold conditions in the crypto market. Readings above +100 suggest an asset is overbought and potentially due for a correction or reversal to the downside. Readings below -100, conversely, signal that an asset is oversold and a bounce or reversal to the upside is in order. By identifying these extreme conditions, you can anticipate potential changes in market direction and adjust your trading strategies accordingly.
Confirming trend strength
You can also use the Commodity Channel Index to confirm the strength of a trend. CCI values tend to be above zero during strong uptrends, while they remain in negative values during strong downtrends. By monitoring the direction and magnitude of the CCI readings, you can assess the current trend’s strength and make more informed trading decisions.
Generating buy and sell signals
Traders also use the CCI to generate trading signals. Since you can identify when a crypto asset is overbought or oversold using the indicator, it also gives you pretty accurate timing on when to buy or sell that cryptocurrency.
Analyzing divergence
As a momentum oscillator, the CCI helps measure divergence. Using this indicator, you can tell when a cryptocurrency’s actual price moves differently than the oscillator. These regular and hidden divergence patterns can provide valuable insights into potential trend reversals or continuations, which you could utilize to your benefit.
Conclusion
The CCI isn’t a very common indicator for technical analysis. Still, it remains a highly useful oscillator for spotting trend reversals and identifying divergence. However, the CCI is a lagging indicator, so it works best in combination with other technical analysis tools and a proper discerning eye.
FAQ
What is CCI in crypto?
CCI in crypto stands for Commodity Channel Index. It is a handy technical indicator that enables users to spot when a cryptocurrency may have likely been oversold or overbought.
What is the best setting for the Commodity Channel Index?
You can use the Commodity Channel Index for several different timeframes. But the 20-period timeframe is arguably the best and most common setting, especially for day traders.
How do you use the commodity index?
You use the commodity index to identify price movements and trend strengths. CCI values over +100 are considered overbought, and those below -100 mean the token’s price has entered oversold territory. Adjust your entry and exit points with these in mind.
