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Trading the CCI Indicator on the crypto markets

Trading the CCI Indicator on the crypto markets

Crypto Technical Analysis

28 Feb 2020

Developed by Donald Lambert, the CCI (commodity channel index) Indicator identifies long term-term trend changes, looking at cyclical trends in an asset’s price history. As its name suggests, the technical indicator was initially developed to monitor trends on the commodities market, but the CCI Indicator is just as useful when applied to other areas such as the crypto market.

Structure of the CCI Indicator

Like all technical indicators, the CCI has its own formula which is used to generate its readings:

(typical price - simple moving average) / (0.015 x mean deviation)

What the CCI does is comparing the current price to an average price or a specified time period. The default for the time period is usually 14 periods, just like with the RSI and Stochastic indicator. Here, a time period refers to the number of price bars that are included in the calculation of the indicator. As a rule of thumb, the shorter timeframe used for the indicator, the higher the sensitivity. Long-term crypto traders will more likely use daily and weekly charts, whereas daily crypto traders prefer shorter intraday timeframes.

The CCI indicator usually oscillates between major levels: -200, -100, 0, +100, +200. Like with the other momentum-based oscillators, the values refer to a market that is either oversold or overbought where a reading above +100 signals a bullish market and below -100 signals a bearish market.

Trading crypto with the CCI Indicator

When the CCI goes below -100, reading the market as oversold and bearish, it means the crypto asset’s price is creating lower highs and lower lows. This generates a buy or sell signal, depending on your trading strategy.

In the same way, a market that has been in an oversold condition for some time and then starts generating CCI readings of above +100, there’s a good chance of a reversal with a series of long and green candles.

More advanced crypto traders might use the CCI Indicator to identify short-term price trends to initiate counter-trending trades. For example, scalpers would wait for the CCI to read below -100 on a short intraday timeframe, and then go long waiting for the asset to bounce back from its oversold state.

Like with any indicator, the CCI can also produce false signals and it is always advised to use a combination of technical indicators to create a more precise view of the market conditions.

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