The Commodity Channel Index (CCI) is a technical indicator used to identify overbought and oversold conditions in the market. It measures the current price level relative to an average price level over a specified period of time.
To identify overbought conditions, traders look for high values of the CCI indicator. Typically, a CCI reading above +100 is considered overbought, indicating that the price has moved too far above its average and may be due for a correction or reversal. Traders may consider selling or taking profits in this situation.
On the other hand, oversold conditions are identified by low values of the CCI indicator. A CCI reading below -100 is generally considered oversold, suggesting that the price has moved too far below its average and may be due for a bounce or reversal. Traders may consider buying or looking for opportunities to enter a position when the CCI indicates oversold conditions.
It is important to note that the CCI is used in conjunction with other technical analysis tools and indicators to confirm signals and avoid false signals. Additionally, interpretation and threshold levels may vary based on individual trading strategies and preferences.