Defining the CCI
The CCI is a technical oscillator that helps determine when an instrument has moved to an extreme high (overbought) or extreme low (oversold) over a defined period. Developed by Donald Lambert, the indicator quantifies the relationship between the instrument’s price, a moving average (MA) of the instrument’s price and normal deviation (D) from that average. It is computed with the following formula:
CCI = (Price – MA) / (0.015 x D)
The CCI normally moves on both sides of a zero line. Typical oscillations occur within the confines of +100 and –100. Readings above +100 signify overextended buying pressures, while readings below –100 signify overextended selling pressures.
The indicator is most effective if its signals are taken during an ongoing trend and in the predominant direction of that trend — not against it.