As a Chartered Market Technician, I get a lot of questions about technical indicators and how they work. In a recent XLT class, I was asked about the Commodity Channel Index (CCI) indicator as some of the students noticed I had it on my charts. The first thing I want to mention about technical indicators is that they are all lagging and are not to be used as decision making tools. In other words, when they give their buy and sell signals, it will always be at least one candle after the optimal entry point on price.
So how can we use these indicators? They can be useful as a decision support tool. Identifying divergence on an indicator or that you are in an overbought or oversold situation can help you identify high probability opportunities in the markets when price is at supply or demand.
I mentioned the terms overbought and oversold. I should explain what these mean. The CCI falls into the family of indicators known as oscillators. Oscillators typically have a level that marks overbought and oversold. … Continue Reading
