CCI Trading Strategy: Statistics, Facts And Historical Backtests!
The CCI (Commodity Channel Index) is a technical indicator that measures the current price level of a security relative to an average price level over a given period. It is a momentum oscillator that is used to identify extreme conditions, such as oversold and overbought conditions, in the market. Its readings are relatively high when prices are far above their average and relatively low when prices are far below their average.
Technical indicators help traders in timing the market, and the CCI (Commodity Channel Index is one of the indicators you can effectively use to time the momentum in the market. But what exactly is the CCI trading strategy, and what does it tell you about the market?
We start the article by explaining the theory behind the indicator, and we end the article by doing some backtesting CCI indicator.
What is CCI?
The commodity channel index (CCI) is a technical trading indicator that measures the current price level of a security relative to an average price level over a given period. It is a momentum oscillator that is used to identify extreme conditions in the market. Its readings are relatively high when prices are far above their average and relatively low when prices are far below their average. Extreme values may indicate overbought/oversold conditions in the market.
Originally, the CCI was used to trade commodities, but over the years it has been adopted to trade every kind of financial security including stocks and ETFs. The commodity channel index forecasts when a market cyclical reversal is likely. One of the fundamental theories of the CCI is that market moves in cycles, with peaks and troughs coming at time intervals.
One of the fundamental theories of the CCI is that market moves in cycles, with peaks and troughs coming at time intervals.
The CCI oscillates above and below the zero point. Below is a chart that shows how a 10-day CCI oscillates up and down:
When the commodity channel index moves from a positive or near-zero region to below -100 that may be telling you that a new downtrend is underway. When that happens, you can wait for a retracement in price followed by a downward movement of both price and the CCI to signal a selling opportunity (according to the original theory behind the indicator).
The same method applies to a new uptrend. When the indicator goes from a negative or near-zero region that may indicate the emergence of a new rally. At this point, you may want to get out of any short position and look for buying opportunities.
Generally, CCI is said to be overbought when it moves above +100 and oversold when it moves below -100. However, the CCI reading of oversold/overbought levels in the market is unbound. This is so because different security behaves differently from one another.
As a trader, you have to look at a security’s historical reading on the CCI to get a glimpse of where the price reversed. For instance, the SPX (S&P 500) may tend to reverse at the +150/-180 region whereas the NDX (Nasdaq 100) may tend to reverse at the +200/-130 region. You may want to zoom out on your chart to see reversal points and the reading of the CCI at those points.
What is the formula of the CCI?
The formula of the CCI indicator is based on four steps listed below in sequential order:
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First, you must calculate the typical price, which is the mean value of the high, low, and close.
The formula is:
High = the highest price for the set period.
Low = the lowest price for the set period.
Close = the closing price for the set period.
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Compute the simple moving average of the above for a given number of periods used.
TPma = moving average of the typical price
TP = the typical price for a given nth period
n = the number of periods for the average
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Compute the mean deviation. The formula is as follows:
TPn = typical price for the nth period.
TPma,n = the simple moving average of the typical price for the nth period.
n = number of periods.
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Finally, the commodity channel index is computed as follows:
CCI = the commodity channel index for the current time.
TPt = the typical price for the current time.
TPma,t = the simple moving average of the typical price.
.015 = constant.
MDT = the mean deviation of the current time.
The calculation of the CCI formula is done automatically by your trading software – its too time consuming to calculate by hand, because it requires so many steps.
What is the best CCI indicator setup?
The best CCI indicator setup uses it as an overbought and oversold indicator with a relatively short lookback period. We provide data driven backtests further in the article to show you why.
Can the CCI indicator be used to find divergences?
The CCI can be used to find and show bullish or bearish divergence with price. This is when the indicator is moving in the opposite direction to the price.
When the indicator is rising and the price is falling, it may indicate the weakening of the downtrend. But if the indicator is falling with rising price, the uptrend is losing momentum and a reversal may be likely.
Divergence may not be an accurate reversal signal, but it should still be considered a warning sign that market conditions may change. Therefore, traders should adjust risk accordingly.
Can you use the CCI to pinpoint overbought or oversold conditions?
The CCI indicator is a good indicator to identify and pinpoint overbought and oversold levels. When the CCI indicator shows values that are low it signals oversold, and it signals overbought when it’s high.
Whether or not this works for the asset or stock you are looking at depends on several factors. This is why we backtest to get data-driven numbers to establish statistics and facts. If you don’t backtest, how do you know if you have a positive expectancy in the long run? It’s easy to establish anecdotal evidence, but you only risk fooling yourself.
Can you use CCI to Identify oversold levels?
The stock market has worked well for mean reversion trading strategies since S&P 500 futures trading started in 1982, and hence, trading on oversold levels has worked well. Shorting overbought levels have not worked well because of the long term upward bias in the stock market.
Historically, a 9-day lookback period has worked well for the S&P 500 when using a buy threshold of -90. We show you the evidence in the strategy backtest further down in the article.
Which assets and trading instruments does the CCI work best on?
The CCI indicator works best on stocks and partially bonds. This is because these two assets tend to revert the mean, and hence overbought and oversold levels are useful.
What are the best assets to trade using the CCI indicator?
The best assets to trade using the CCI indicator are stocks and bonds. We found out by backtesting to establish facts.
What are the advantages of using the CCI indicator?
The advantage of using the CCI indicator is that it’s useful in spotting overbought and oversold conditions. It’s based on a specific formula, and thus you can quantify the results.
What are the disadvantages of using the CCI indicator?
The disadvantages of using the CCI indicator are that it’s a lagging indicator and it works only on stocks and bonds. It’s not particularly useful in detecting trends in the markets.
Which time frame is best for the CCI indicator?
The best time frame for the CCI indicator is daily bars and a short lookback period. For example, if you are trading stocks, a relatively short lookback period between 5 and 9 works well.
Are there any other technical indicators similar to the CCI?
Many technical indicators, such as the Relative Strength Index (RSI), Rate of Change (ROC), Stochastics, and MACD, are similar to the CCI.
Who invented the CCI indicator?
The CCI indicator was invented by Donald R. Lambert in 1980 to spot reversals in commodities, but the indicator is now widely used in other securities including stocks and ETFs.
When was the CCI indicator invented?
Donald Robert invented the CCU indicator in 1980. He published the commodity channel index in the Commodities magazine (now Futures) in 1980. Originally, the CCI was used to trade only commodities, but now, it is used to trade in any market. The indicator has been in use for more than three decades now and has become more popular with the emergence of automated trading systems.
What are the limitations of the CCI?
The main limitations of the CCI indicator is that it is dependent on price, and this makes it a lagging indicator. Also, the indicator is not a timing tool as it does not indicate at what particular point in the market you should be entering.
The market can be at an overbought/oversold level for a prolonged period of time, which might make you miss out on the current move since you will be waiting for a reversal that may or may not happen. If you want to use this indicator, backtest your strategy and optimize it for robustness before putting your money on the line.
What are some CCI trading strategies? (rules, backtest, statistics, and facts)
Let’s go on to backtest some trading strategies for the CCI. We have never had any experience with the CCI indicator before and thus this is the first time we backtest the indicator.
When we try something new we like to use strategy optimization. This way, we get a better “feel” for how the indicator performs. As usual, we backtest the CCI indicator on S&P 500 by using the ETF with the ticker code SPY. The CCI might work better on other assets.
CCI trading strategy no. 1
The first trading strategy has the following trading rules described in plain English:
Trading Rules
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When we “optimize” this we get 200 different simulations:
The first three columns show the variables we put into the formula. The rest of the columns are trading strategy metrics.
The table doesn’t contain all the results but only the best 20% ranked on the profit factor. We tried with wider observations in the CCI but no matter what we couldn’t get much better results than a profit factor of 1.6. This is lower than our minimum requirement of 1.75.
CCI trading strategy no. 2
Based on the simulations we decided to backtest the CCI indicator by using a 9-day lookback period and a buy threshold of -90. We sell when the close is above yesterday’s high. However, this is a backtest that might be susceptible to curve fitting.
Based on the requirements we get the following equity curve:
The CCI trading strategy has a profit factor of about 1.8 and the average gain per trade is 0.55%. Max drawdown is a modest 23%. The result is pretty good, but we believe there are better indicators. We would prefer to use other trading indicators that show better backtests:
Moreover, we present our best trading strategies for our paying subscribers.
What is the best CCI trading strategy?
The best CCI trading strategy is using oversold levels with relatively short lookback periods and applying it in the stock market.
CCI trading strategy code and plain english
The code for the CCI trading strategy and over 100 hundred other trading ideas can be purchased for a small fee. Some of the strategies have Tradestation code. All come with descriptions in plain English. Please click on the banner below to read more or order:
CCI indicator – ending remarks
The CCI indicator (Commodity Channel Index) is one of many oscillating trading indicators and many of them are pretty similar. The CCI indicator is good, but there are better, for example, the RSI indicator.