Before using the Commodity Channel Index (CCI), you must know how it works.
The CCI first averages each candle by adding the Open, High and Low and dividing it by 3.
Then it creates a moving average from the average of each candle.
This moving average is te=hen divided by a mean deviation and a standard deviation is applied. This makes the CCI oscillate between +100 and -100. There is no set range of the CCI – it can go to any high or low.
So long the price of a security moves within this range, you can assume that it is business as usual.
…when the CCI crosses above +100, you can assume that the price of the security has started moving way above from its averages as calculated by CCI. This is a bullish signal.
…when the CCI crosses below -100, you can assume that the price of the security has started moving way below from its averages as calculated by CCI. This is a bearish signal.
However, what you should know is that if CCI moves way above +100, to say 200 0r 300, it implies the price has deviated too far way from the average price and that it is possible that the volatility is about to end. Similar logic applies to when the price falls way below -100..
The CCI default Period is set at 20 and it is recommended that you do not tweak it.
HOW TO USE CCI TO DISCOVER TRENDING CASH STOCKS
You now how how the CCI works, and that is a good thing because you must understand how each indicator works before applying it.
In the case of cash stocks, you must use CCI as a screener and not as a trade indicator.
You must work on 2 periods – WEEKLY AND MONTHLY.
Your screener setting should be
CCI (20) crossed above 100 (for each of the periods specified above).
The inference is that when a cash stock crosses above its smoothed and pivot-like CCI average, then it implies that something is up and the stock merits a look.
Whatever stocks are thrown up by the screener – remember to avoid penny stocks and stocks backed by low volumes.
Apply it on CASH (B Group) stocks. All the picks you get should be held for a positional trade and you also must check fundamentals.
Now, here is an example of CCI signalled a buy in Praj Industries on the weekly and monthly charts:
The CCI crossed above 100 in both the weekly and monthly charts ahead of the price eaking ot. Of course, it is normal that the weekly charts gave a signal first because the buying built up on the weekly chart and then spilled over into the monthly chart.
This is how you can use the Commodity Channel Index (CCI) to discover trending cash stocks for the medium-long term.