To use any instrument like a professional, one must understand its fundamental purpose. The same is true of the technical indicators such as RSI, Fibonacci and the CCI indicator.
What Is The Role Of The CCI Indicator?
The principal function of the CCI is to measure the deviation of a financial instrument from a particular moving average.
In effect, the CCI period fourteen will be beyond the plus hundred level (+100) when there is, at least, a positive standard deviation two from the moving average fourteen. On the other hand, the CCI period fourteen will strike the oversold zone when a negative standard deviation two (-2) from the moving average fourteen is in place. Similarly, the CCI period twenty will become overbought or oversold when the deviate from the moving twenty with the equivalent standard variation plus or minus two (at least).
If one is using the CCI period X, one is effectively estimating the price's deviation from the moving average period X.
Indeed, the CCI is overbought when the price strays positive two (2) standard from the moving average period X. Contrary, it will be oversold if there is, at least, negative two (-2) standard deviation from the moving average period X.
Similarities Between The CCI Indicator
And Bollinger Bands.
Many investigations have revealed that the CCI indicator is nearly a proxy or different representation of the price action in the Bollinger Bands. For instance, the CCI period twenty is essentially another view of the price action in the Bollinger Bands (20, 2).
Besides, the CCI period fourteen is to a certain degree the price-action in the Bollinger Bands (14, 2). In each circumstance, when the CCI is above plus hundred (+100) level, the price is also at the upper band, but as the indicator becomes oversold, the price is also tagging the lower band.
View the chart.
Image = "Bidu incorporated stock weekly chart that is illustrating
the positive correlation between the oversold and overbought
CCI indicator period twenty-one and Bollinger Bands (21, 2)"
When the CCI crosses above the center line (50), the is also crossing above the middle band and vice versa.
The association between the CCI and the price action in the Bollinger Bands is reliable more than ninety percent of the time except during distortions and divergences.
The upper band corresponds to the overbought level.
The oversold zone (minus hundred level) compares to the lower band.
The central line resembles the middle band.
The CCI matches the price action.
The deviation of the CCI to the central line answers to the difference of the price action to the middle band.
Following those considerations, one may interchange the CCI oscillator period x with the Bollinger Bands (x, 2). Subsequently, it is irrelevant for traders to plot both the CCI x and Bollinger Bands (x, 2) on the same chart.
The Advantage Of Using The CCI Instead
Of The Bollinger Bands
Though, there are many connections between the CCI and the Bollinger Bands, the CCI enables traders to identify both the conventional divergences and unfamiliar discrepancies. Hence, it provides leading trading signals which the price-action must authenticate with direct trading signals.
The CCI also smooths the price action and reveals the price patterns.
Subsequently, the Commodity Channel Index (CCI) indicator helps day and swing traders to stay away from the distorted price-action that frequently take place throughout extreme volatility, market manipulations and accelerated financial markets adjustments
(or market corrections).