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The CCI Indicator Explained For Beginners - Learn How Traders Use It - YouTube
Channel: Earn2Trade
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Greetings traders and welcome back to
another Survival Guide.
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Chris here, bringing you
some more information.
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Today, that information is going to be
all about the CCI,
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that is, the Commodity Channel Index.
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This is an indicator that's a momentum
oscillator that can
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potentially help us better identify
overbought and oversold
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scenarios when read correctly.
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We're going to talk about exactly what
the CCI is, as well
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as how to identify these overbought and
potentially oversold scenarios.
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Before we do that,
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the first thing that we need to do
is just put it on our
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charts. So let's go ahead and go towards
the top center and
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click the "Show Indicator Options"
button on the Finamark
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platform. After we do that,
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we need to add a new section because
the CCI is an oscillator
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that is listed below price. It does not
directly overlay price.
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Now that we have the second section,
if we click on the second section,
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scroll down the center column
to the C's, we'll see
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Commodity Channel Index. Give that a click,
return to our charts,
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resize it down a tad, and now we
are good to go.
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Without further ado, let's dive on into
that material and
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while we're going through these
disclaimers, please click
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that like and subscribe button down
below because it allows
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me to keep coming out with these videos
for you guys. Here we go.
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The Commodity Channel Index. It's been
around for some time
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and it is very, very popular,
but let's start off with what it is.
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We briefly got to look at how it
looked on our chart,
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here's a picture on the right hand
side just in case you
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already forgot, but the Commodity Channel
Index is a momentum
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oscillator that helps determine when the
traded asset reaches
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an overbought or oversold condition,
potentially speaking,
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if we analyze it correctly.
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It is used to better assess the direction
and the strength
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of a trend, as well as to spot reversals
by traders and potential
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market extremes. The CCI indicator was developed
by technical analyst and
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mathematician, Donald Lambert, and was
introduced in the Commodities
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Magazine in 1980. As the name suggests,
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the indicator's initial idea was to
help increase trading
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efficiency in the commodities market.
It did that by mitigating
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timing challenges associated with
the entering of cyclical
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and seasonal markets. At the time,
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this was a significant problem for
technical traders, as they
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struggled to adequately forecast
seasonal market changes and
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to take into account the cyclical events
resulting in the
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price fluctuations. Thanks to its
efficiency over time,
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the CCI indicator became a favorite
tool by traders to use
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in the equity and the Forex markets.
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But today, now the CCI is
seen in many markets,
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just about any type of any vertical,
we're seeing the CCI
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used. If you can chart it,
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the CCI most likely can be applied to it.
Most use the indicator
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to determine their entry and exit points,
or when to jump
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into a trade, or potentially when to
avoid a trade entirely.
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It also helps traders identify whether
they should add to
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an existing position. The CCI helps
traders by achieving this
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through the process of comparing the
current price fluctuations
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in the traded instrument with the
historical ones. On the
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graph, the indicator is plotted as
a line with a box that
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fluctuates between negative 100
and positive 100.
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For those of you that were dying to
look at some math today,
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well, here you go. This is the formula to
calculate the CCI.
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Now, once again, the calculation is
done by the indicator for
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us, so we don't necessarily ever
need to do this, but I am
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a big proponent on making sure that
we understand how the
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indicator we're using works. So that's
what we have here.
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If you're interested in recording this,
I recommend pausing
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the video and copying this
mathematical formula down.
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The methodology behind the calculation
of the CCI is relatively
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simple. The first thing that we do is we
define the periods
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that we want to analyze. Usually 14
periods are the default,
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so that's normally what the CCI is
going to be analyzing.
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The fewer periods
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we analyze, the more volatility we're
going to see.
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If we see a higher period setting, like a
21 period setting,
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we're defining a smoother aspect in
that volatility spectrum,
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so it won't be nearly as volatile.
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The next thing that we need to do
is track the high, low, and
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close for each period. That way, we can come
up with the typical price value.
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We will then compute the moving
average of the typical price,
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and to do that, we're going to sum up the
last 14 typical prices and divide
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them by 14, if we use the 14 period
moving average default
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setting. Then, we're going to calculate
the mean deviation
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for each period based on the
formula mentioned that we were
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talking about. If we take look at this
formula, that's going to be our
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road map. We're going to sum up all the
values and then divide them
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by 14. That's essentially
all there is to it,
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but once again, don't panic if you
aren't good at math or
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not interested in doing math, because
the CCI indicator is
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doing exactly this for us, but at least
now, you know exactly
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what it's doing for us.
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To interpret the Commodity Channel Index,
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it's important to understand that it
represents the difference
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between the current and average
historical price change for
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a particular security. High positive CCI
values indicate that
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the current prices are above their
average, and this is a
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sign of a trend strength. Low
negative indicator readings
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suggest that the prices are below
their average, which is
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a sign of market weakness.
Traders can choose to use the CCI
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as either a leading or coincided indicator.
When uses a leading indicator, the CCI
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helps recognize overbought and oversold
market conditions
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that might lead to a mean reversion
reversal, as well as a
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bullish and bearish divergence, or even
potentially it foreshadows
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some type of momentum shifts. On the
other hand, when we use
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it as a coincided, the CCI signals the
emergence of uptrends.
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When we have surges above the plus 100,
or down trends that
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are dipping below the negative 100,
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these are examples of of strong trend confirmations.
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70-80% of the time, the CCI will
move in the range
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between the negative 100 and
the positive 100.
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However, during the rest, that 20-30%, of
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the time, it will be outside of those
levels, which will indicate
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an unusual strength or potential weakness
in the current
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market environment.
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Such scenarios are considered a
signal of a potential extended
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move, and filters for the current bullish
bearish market direction
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itself. When the CCI ranges over the 100
mark, it is considered
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favorable for the bulls.
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When it's moving below the negative
100 mark, it is considered
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a bear signal. In the general case,
when the CCI moves from
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negative or near zero territory to
surpass to the 100 mark,
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it is usually considered an indication
for the beginning
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of a new and strong uptrend.
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If we see it go from the bottom
to the top, this is usually
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an indication of a powerful bullish
trend emerging in the
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market from a previously bearish
market scape
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Of course, the opposite holds true.
If we watch the CCI
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travel from on top to down on bottom,
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we are on the lookout for a potential
bearish trend thereafter.
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Spotting overbought or oversold price
levels is another way
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traders use the CCI.
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It's based on simple logic. When the
indicator is above 100, positive 100,
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the price is above its average. When
the CCI is below negative
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100, it is currently below its historical
average. Alternatively,
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zones over the plus 100 and below
the minus 100 marks indicate
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those overbought and oversold levels.
When were over 100, we're
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considered to be overbought and
we're expecting some type
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of mean reversion.
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That means we're expecting the market
to move back down towards
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the historical average, because it is
currently experiencing
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an abnormally high degree of buying
prowess. When we are below
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the negative 100, the same logic applies,
just flip the other
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way. When we're below
negative 100,
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we can couple this with a read
that the market will ultimately
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be looking to move back towards that
historical average at
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some point, because it does not spend
the majority of time
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at or below the negative 100 mark,
or at or above the positive
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100 mark. We can trade this with
the expectation that the
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market will be sucking back in
with the coupling of price
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action. Another strategy that traders
employe with the CCI
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is by paying attention to the
divergences between the
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direction of the CCI itself and price.
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This means that the CCI is going to
be going one way, but
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price is looking to be going the
other. This is a divergence
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because they are diverging
in their paths.
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They are no longer mirroring each other.
The general accepted
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theory in this case is that price will
ultimately resume in the direction
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of the CCI. In the case of the
divergence that we have
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listed here, we would be expecting
to see price resume to
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some bullish state, which it did indeed
do. This is because
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the CCI was rising while price was
falling, and something
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has to give. This can happen the
other way around as well.
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If the market itself and price action
was rising, but the
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CCI was falling, we would want to be
on the lookout for the
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market to fall. Now, it's important to keep in
mind that the divergence strategy
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is not a robust strategy by itself
because it never properly
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identifies an exact entry point.
The divergence can last for
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an extended period of time. Instead,
when we notice the divergence,
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it's important to be aware of it as
a foreshadowing of what's
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to come and make sure that our
trading strategies are in
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line with what is possibly
going to happen.
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As with all indicators, there are going
to be advantages
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to them, and there's going to
be potential drawbacks.
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Let's start off by taking a look at the
advantages that the
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CCI particularly likes to offer.
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The first is the fact that it works
in a variety of markets.
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When you hear the "Commodity Channel
Index" term for the very
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first time, it's natural to think that
it's designed to work in only
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the commodities markets.
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But the truth is, we can apply to
equities, Forex, futures,
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it just doesn't matter. The CCI is
just a solid all-around
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indicator that does well with
any charting style.
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The important thing to note is
that the CCI should be adjusted
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based on the instrument that we're
measuring's historical volatility.
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The second advantage is the fact that
it's easy to comprehend,
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even by beginners. The way the Commodity
Channel Index is designed makes it
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very easy to use and interpret,
even by beginners.
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All we have to do is adjust the CCI
to the number of periods
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we want to analyze, and we're off.
Once we do that, we are ready
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to go by using the CCI to give us those
overbought and oversold
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readings, like we already talked about.
The more we use
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it, the better we'll be able to spot
the potential fake outs
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and the potential juicy signals.
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The third advantage is the fact
that it's a very powerful
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indicator. The CCI indicator can
inform the trader about
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various market developments, including
both those overbought
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and oversold price levels, the divergences, and even emerging
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new trends. The fact that it also
provides insight into the
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price momentum and its strength,
makes it one of the most
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complete technical trading
indicators out there.
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Now, we'll cover the potential
disadvantages, and the first
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is the overbought and oversold levels
are indeed subjective.
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Due to being an unbound indicator, the CCI
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can't guarantee that when it drops
below negative 100 or
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climbs above positive 100,
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it is a fair indication of an oversold
or overbought market by itself.
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These are levels that are going to
be dependent on being
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reached based on the period that we
have the CCI set to.
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We do need to get comfortable with
adjusting the settings
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of the CCI and making sure that
when the market has reached
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these levels, it has responded accordingly
to how we're anticipating
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and using it. Number two is that it
shouldn't be used as a standalone indicator.
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This can be said for basically every
indicator out there
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but it was important to include as well.
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This is just the concept that
using price action to
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sum up the concept of a buy or a
sell being entered into
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the market on the basis of the CCI alone
is a very, very, very
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nice layer of confirmation to add to
our process of using
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the CCI. Number three is it doesn't
take news into account.
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Once again, most indicators don't
do this either. The fact
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that the CCI doesn't take news into
account means that if
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it is measuring around a particularly
volatile period that
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was caused due to news, it might
skew the results of the CCI.
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so we need to take into consideration
what's going on in
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the markets and always be
aware of the news.
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The CCI can be summed up as
a universal tool that can
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potentially provide those overbought
and oversold scenarios,
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on top of potential market direction
derived from the divergence,
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or help us in the way of spotting
emerging trends.
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It's a very, very useful tool.
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I strongly recommend checking
out the CCI indicator
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if you have not used it already.
It's something that can
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be very powerful, especially for
those of you that are looking
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to develop your own strategy and
haven't quite found one
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that fits you yet. When used in
conjunction with outside price action,
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it's a very powerful tool.
But until next time folks,
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Thank you for joining me, as always.
Please do me a favor:
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click that like and subscribe button
down below, and I will
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see you in the next one. Cheers folks!
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