CCI

The CCI indicator is very popular. Many groups have formed around them to do daytrading and position trading. (see www.nqoos.com)
The Commodity Channel Index (CCI) is a price momentum indicator developed by Donald R. Lambert in 1980. It is designed to detect beginning and ending market trends.  CCI represents the position of current price relative to the average of price over a recent period.  Lambert discussed CCI in detail in a 1980 article in Stocks and Commodities V.1:5(120-122).

Developed by Donald Lambert, the Commodity Channel Index (CCI) was designed to identify cyclical turns in commodities. The assumption behind the indicator is that commodities (or stocks or bonds) move in cycles, with highs and lows coming at periodic intervals. Lambert recommended using 1/3 of a complete cycle (low to low or high to high) as a time frame for the CCI. (Note: Determination of the cycle's length is independent of the CCI.) If the cycle runs 60 days (a low about every 60 days), then a 20-day CCI would be recommended. For the purpose of this example, a 20-day CCI is used.

The CCI usually falls in a channel of -100 to 100. The conventional CCI trading system works as follows.  When it rises above 100, buy and hold until CCI falls back below 100. When CCI falls below -100, sell short and cover the short when it rises above the -100 line. Some trading systems cover on a rise above minus 85. 

Since Lambert's original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals.

• CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when the CCI dips below -100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above -100. From overbought levels, a sell signal might be given when the CCI moved back below +100.
• As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive divergence below -100 would increase the robustness of a signal based on a move back above -100. A negative divergence above +100 would increase the robustness of a signal based on a move back below +100.
• Trendline breaks can be used to generate signals. Trendlines can be drawn connecting the peaks and troughs. From oversold levels, an advance above -100 and trendline breakout could be considered bullish. From overbought levels, a decline below +100 and a trendline break could be considered bearish.

Traders and investors use the CCI to help identify price reversals, price extremes and trend strength. As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment.

In the Chart below I have put two CCI indicators. One with a periode of 21, and one with a period of 200. As you can see trading in the short period and exiting could be based upon two different time frame for the same indicator.

A good entering point would be where the short and the long term CCI cross the buy point. According the long CCI you should still be in, since it hardly dipped down and your position would have been profitable from the start. So in this case the CCI is used as a reversal signal.

Bulding a trading system with the CCI

I once build a trading system with CCI that was looking for extreem overbought or extreem oversold situations. So a CCI of 250, meant going short when it crossed from +250 below the 250 line. Same for a good minus value. The system traded well execpt for long periods of decline, or long period of uphill markets. However it works well in a trading market (sideways movement) as opposed to trending market.