Trading

How to apply the CCI indicator to crypto trading

August 20, 2019

The CCI Indicator (Commodity Channel Index) is designed to identify long-term trend changes. It was developed by Donald Lambert, a technical analyst, who was looking to spot cyclical trends in the asset’s price history. In spite of the fact that  it was created to monitor trends relating to commodities market, the CCI is often applied across all markets, including the volatile cryptocurrency market.

The CCI falls under the oscillator classification as it is a momentum-based indicator. In this blog post, we take a closer look at the CCI indicator and how to best apply it in the daily crypto trading process.


Structure 

As is the case with all indicators, the CCI has its own formula which is used to calculate its value.

(Typical Price - Simple Moving Average) / (0.015 x Mean Deviation)

In essence, the CCI indicator compares the current price to an average price over a set period of time. Similar to Stochastics and Relative Strength Index (RSI), the default period for this indicator is 14 periods. The period refers to the number of price bars the indicator will include in its calculation.The slower the indicator is set, the higher the sensitivity is. Long-term crypto traders will prefer daily and weekly charts and the higher period. On the other hand, daily crypto traders and scalpers are more in favor of shorter timeframes and the lower period. 

As seen in the price chart below, the period can be easily set on Sparkdex exchange. All you need to do is select the “Commodity Channel Index” from the drop-down “Indicators” menu and set the value at 14.

CCI Indicator on Sparkdex
CCI Indicator on Sparkdex


In general, the CCI indicators usually oscillate between major levels: -200, -100, 0, +100, +200. Similar to other movement indicators, the values refer to “overbought” and “oversold” conditions. Any move above +100 or below -100 refers to a strong market in one of the two directions. Most of the time, the values range between these two levels. 


Trading CCI Indicator

As a general rule, any reading above +100 signals a bullish market i.e. the market is strong and signals an uptrend, and vice versa with readings below -100. The CCI indicator is best used when combined with other indicators, as it helps the trader to form the big picture of the state of the market. 


Trading CCI on Sparkdex - bearish
Trading CCI on Sparkdex - bearish

As seen in the price chart above, the CCI signals the market is oversold and the market conditions are bearish. Once the CCI enters the negative territory (-100 or lower), the price of the asset dips lower as it creates a series of lower highs and lower lows. The moment the oscillator reads below -100 should be used as a signal that the present trend is bearish. Thus, the indicator helps generate buy or sell signals.

Similarly, the price chart below shows another sample of the ride-the-trend strategy based on the CCI. In this particular case, the market has been oversold but signs of improvement have been seen in the previous days. The CCI improves and crosses the +100 threshold, which coincides with a series of long and green daily candles. 



Trading CCI on Sparkdex - bullish
Trading CCI on Sparkdex - bullish


Moving away from more conventional strategies, traders also use the CCI to identify short-term trends and then initiate counter-trending trades. For instance, scalpers know to wait for CCI to drop below -100 on a shorter time-frame (e.g. 30 mins) and go long, waiting for the asset to bounce from the oversold condition. Of course, this indicator, as well as any other indicator, also produces a great deal of false signals. For this reason it is advised that a trader should always combine it with other popular indicators to create a more coherent picture of the state of the market. 


Identify trend direction with the CCI indicator

The CCI indicator is a momentum based-indicator often used by crypto traders to identify trend direction. It can be applied across all time frames, depending on the nature of the trader. The most conventional trading strategy that includes CCI uses readings above +100 (bullish market), or below -100 (bearish market) to apply the ride-the-trend strategy. On the other hand, many traders use CCI on lower time frames predict the change of direction once the market enters an overbought or oversold phase. 

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