Trading the BSE with the CCI
The Commodity Channel Index (CCI) measures the variation of a security's price from its statistical mean. High values show that the price is unusually high compared to the average price, whereas low values indicate that the price is unusually low.
85% of the data points will fall between +100 and -100. The levels of +200/-200 may be considered extremes. However, the CCI is not bound by maximum or minimum values. Contrary to its name, the CCI can be used effectively on any type of security, not just commodities. Interpretation There are two basic methods
of interpreting the CCI: one is divergence and the other is as an
overbought/oversold indicator. |
- Bullish divergence occurs when price is making new lows while the CCI is rising. This classic divergence is usually followed by a correction in the price. Bullish divergence is the opposite of bearish divergence.
- The CCI typically oscillates between 100. To use the CCI as an overbought/oversold indicator, readings above +100 imply an overbought condition (and a pending price correction) while readings below -100 imply an oversold condition (and a pending rally).
Below is an hourly chart of the BSE Sensex with the Commodity Channel Index set at 14 showing Bullish divergence:
Bullish divergence occurred from point A-B (the price was declining as the CCI was advancing). The market subsequently rallied. Note that this divergence occurred at extreme levels (i.e. below - 100) making it even more significant. Advanced Trading Method: In the hourly chart example of the same BSE Sensex below we have added Bollinger Bands set at 20 to help us with our exact entry point, possible target and exit point. |
Trading Rules (Going Long):
- Identify bullish divergence as shown in the first chart example.
- Enter on the break of price above the top Bollinger Band line (Green arrow).
- Your target is the first close of price below the top Bollinger Band line ( Red arrow)
- Place your stop below the last candle to close below the middle Bollinger Band line.
Conclusion
As with most trading indicators always use the CCI with other indicators like Bollinger Bands shown in the trading method above, to filter out price whipsaws and consolidation periods. Pivot points also work well with the CCI because both methods attempt to find turning points.
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Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument.