The Commodity Channel Index - CCI was designed by Donald Lambert.
CCI is a momentum oscillator, typically used to identify new trends or warn of extreme conditions.
Lambert suggests using the weekly CCI to first identify the trading basis when it goes above +100 or below -100 and then use the daily CCI to get your trading signals as it reaches it's extremes.
Lambert's trading guidelines for the CCI focused on movements above +100 and below −100 to give you buy and sell signals. Because 70 to 80 percent of the CCI values are between +100 and −100, a buy or sell signal will be in force only 20 to 30 percent of the time, with +100 representing a buy signal & -100 a sell.
As the CCI was originally designed for volatile commodities, it makes it a good indicator for penny stocks.
What we are looking for here are oversold & overbought signals and the CCI is a good way to identify them.
When used in conjunction with other oscillators, CCI can be used to identify potential peaks and valleys in price, and gives traders the ability to estimate changes in the direction of price.
As I said earlier, the CCI was designed to be used by first checking the weekly CCI to identify a trading basis and then checking the daily CCI for your entry and exit points. Rather than flipping from screen to screen, you can set up two CCI's on your chart, one set for daily and one with longer period defined to represent the weekly CCI. Just remember there are 5 days in a trading week, not 7.
As with all other indicators, don't just rely on the defaults, adjust your indicators to suit the stock you are looking at and your trading style.
Typically shorter look backs (lower #'s on your indicators) give you quicker signals which is good for aggressive traders, while longer look backs (higher #'s on your indicators) give slower but more reliable signals for traders who are more conservative.
As we always say: "Don't use your hard earned cash to find out what kind of trader you are, use a virtual account for that."
Links for free virtual trading sites can be found on our Resources page:
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The CCI is calculated using the following formula:
Price - Moving Average (MA) / 0.015 X Deviations (D)