Full Review of the Commodity Channel Index for Binary Options Trading
The Commodity Channel Index, or CCI, is an oscillator tool for technical analysis and can be easily applied to binary options. It was originally introduced by Donald Lambert in a 1980 issue of Commodity magazine and has since been embraced by traders of all types. CCI was first used to identify cyclical turns in commodity cycles. However, because of its versatility and the way in which the tool is derived, it can be applied to any chart that includes a high/low/close information. The index can be used to identify a number of signals in markets ranging from commodities to equities, indices and even forex. The index is actually an indicator, an oscillator to be exact, and like all good oscillators can be used to identify trends, warn of extreme overbought or oversold levels, divergence and to confirm support and resistance.
What is the Commodity Channel Index?
The Commodity Channel Index is a technical analysis oscillator that measures current price movement to average price movement over a set period. When the CCI is high it means that price is well above average and is a sign of strength, when CCI is low it means that price is well below average and is a sign of weakness. The standard period is 20 bars, smoothed by a 5 period moving average, and can be used in any time frame. The formulation looks like this:
CCI = (Typical Price – 20SMA of Typical Price)/(0.015 x Mean Deviation)
I’m sure that some of you are now asking, “what is typical price”. It is a value commonly used in commodity and other markets, it is the average of the high, low and close of the most recent bar or candle. The mean deviation is an average of the movement of prices over time and the 0.015 value is used to ensure that 85% of results will be values between 100 and -100, thus helping to identify extreme levels. The values range, over time, between extremes with most of them falling between the target of +/-100. Extremes can be as high or low as +/-400. Signal lines are drawn at 100, -100 and 0 with each providing opportunity for signals. Both the smoothed and the un-smoothed line are displayed, allowing for additional signals based on crossovers.
Signals span the range of any good oscillator and I have to say I am impressed. The easiest signals are rising and falling, when the index is moving higher, and crosses above 0 or 100, it is a sign of strength and a growing trend. The same is true in reverse for down trends. After that there are trend following signals to include tests of support/resistance, crossovers and convergence. Divergence and Overbought/Oversold levels can be used to predict support/resistance and potential areas of reversal. Once reversals are identified CCI can also be used to confirm new trends which leads right back into the trend following signals mentioned above.
Why The CCI Might Suck
This indicator might suck because it is so good you might begin to rely on it alone. This isn’t neccesarily a bad thing but ignoring other signs and signals can often lead to losses. This indicator, like all the rest, is not infallibe and will provide numerous false signals. Understanding trend and how to apply this indicator to trend is key to using it successfully because the indicator will not do it for you. CCI and all oscillators will give bull and bear signals at any time, regardless of the trend, it is up to you to know which signals are the ones you want to take.
The CCI Doesn’t Suck
The CCI definitely does not suck. It is based on sound math, presents in an easy to read format and provides a plethora of technical signals. This could very well become a favorite tool of mine and easily replace stochastic in my day to day analysis. Seriously, you have to love a good oscillator and this is a great one. I could see signals on the charts as soon as I pulled them up, without even reading anything about Commodity Channel Index.
My Last Thoughts On The Commodity Channel Index
The Commodity Channel Index does not live up to its name. It isn’t based on commodities, even though it was intended for them, and it is not an index and it doesn’t channel. What it does do is provide one of the best oscillator tools for technical analysis I have ever seen. I can’t believe I haven’t learned more about this one before but I can assure you I will not be ignoring it in the future. I can wholeheartedly recommend this tool to any trader, new or old, inexperienced or savvy, index or forex it doesn’t matter. This is a great tool and one that you can use, trust me on that.