There is a misconception among cryptocurrency traders that more complex indicators are more accurate in providing trading signals. However, in most situations, the reality is the opposite. Simple indicators often offer better signals than complex ones. The key is for a trader to possess the right skills to identify the appropriate indicator from the available simple options. This task can be challenging. If you are searching for a simple indicator to understand price movements, you can definitely consider the Commodity Channel Index. It is both simple and powerful. Let’s delve deeper into this remarkable indicator.
1. Commodity Channel Index: The Basics
Basically, CCI, or Commodity Channel Index, is a tool for crypto traders to discover if a trading asset is in a situation where it might be a good time to buy or sell. It also helps assess how strong a trend is.
1.1. The Origin of CCI: What You Should Know
The Commodity Channel Index indicator was developed by Donald Lambert in 1980. Lambert designed it mainly for the commodity market. It identified price trends and extreme conditions. Over the years, it has gained popularity. Now, it is widely used in trading, especially in cryptocurrency trading.
1.2. How Does CCI Works
When we launch CCI on a TradingView chart, it appears as a line, oscillating above and below zero, at the bottom of the chart.
Basically, it watches how fast prices change.
The CCI indicator measures the current price compared to the average price over some time. When the price goes above its average, the CCI line goes up, and when the price drops below the average, the CCI line goes down.
1.3. Easy Way to Calculate CCI
Calculating CCI is complex, but if it is broken down into three parts, it can be explained easily.
- Part 1: Find the Typical Price (TP)
| TP = (high + low + close) / 3 |
You calculate TP by adding the high, low and closing prices of a crypto asset and then dividing the total by 3.
- Part 2: Compete the 20-period Simple Moving Average (SMA) of TP
| SMA = Sum of the last 20 TP values / 20 |
The Simple Moving Averages is calculated by adding up the last 20 Typical Price values and then dividing the sum by 20.
| CCI = (Typical Price – 20-period Simple Moving average (SMA) of TP) / (o.015 * mean deviation) |
To find CCI, you subtract the 20-period Simple Moving Average (SMA) of TP from the TP itself. After that, you divide this result by 0.015 times the mean deviation.
2. Launching CCI on a TradingView Chart: Simple Guide
Here are the steps to launch the CCI indicator on a TradingView chart.
- Step 1: Sign in to TradingView
Log in to your TradingView account or create one if you don’t have an account.
- Step 2: Select a Preferred Chart
Use the search bar to find the trading pair or asset you want to analyse on the chart. Click on it to open the chart.
- Step 3: Apply the CCI Indicator
Click on the ‘indicator’ icon located at the top of the chart. In the search bar within the Indicators panel, type ‘CCI’ and select ‘Commodity Channel Index.’
- Step 4: Configure Chart Settings
Adjust the settings for the CCI indicator, such as the period (commonly 20), line colour, or any other preferences you have.
You can also choose to display CCI in a separate pane below the chart or as an overlay on the price chart.
- Step 5: Start the Analysis
Once you have configured the CCI indicator to your liking, click ‘OK’ to add it to your chart. Now you will see the CCI line on your chart. It helps you assess price momentum and potential buying or selling opportunities based on CCI signals.
3. How to Interpret CCI: All You Should Know
The Commodity Channel Index indicator offers valuable signals for traders, including overbought and oversold conditions, signals based on the zero line, and the ability to identify divergence in price movements.
- Strength and Weakness Conditions
When CCI is positive and relatively high, it suggests that the price is significantly above the average, indicating strength in the current trend. Conversely, when CCI is negative and relatively low, it indicates that the price is well below the average, showing weakness in the trend.
- Strong Price Action or Unusual Strength/Weakness
The CCI typically fluctuates between -100 and +100. If it moves beyond this range, it signals strong price action or unusual strength/weakness in the market.
- Zero Line Cross Signals
When CCI crosses above zero, it may indicate a bullish trend, and when it crosses below zero, it can signify a bearish trend. But this method can sometimes produce false signals, so it is common to use -100 and +100 to filter out these false signals.
- Overbought/Oversold Levels
Typically, +200 and -200 are considered extreme levels. So, when CCI crosses above +200, it may signal an overbought situation, and when it falls below -200, it can indicate an oversold situation. However, the actual levels may vary depending on the asset’s volatility. Higher volatility assets might require a wider range, while lower volatility assets might use a narrower range.
CCI can provide divergence signals also. That is, it can help identify a potential weakening of the current trend, possibly leading to price reversals.
- Bullish Divergence: Occurs when the price makes a lower low, but CCI makes a higher low, suggesting a potential upward reversal.
- Bearish Divergence: Occurs when the price makes a higher high, but CCI makes a lower high, indicating a potential downward reversal.
Understanding these signals correctly can help you make informed decisions in the highly volatile cryptocurrency market.
4. Endnote
In conclusion, the Commodity Channel Index is a valuable tool for traders in the cryptocurrency market. It helps determine when to buy or sell assets and assess the strength of trends. By understanding CCI signals like overbought/oversold condition, zeroline crosses, and divergence, you can make well-informed trading decisions. Use it wisely in this volatile crypto market.