A:

The relative strength index (RSI) and commodity channel index (CCI) are two popular technical oscillators that serve as different methods of spotting extreme price behavior. The RSI tracks the speed of price changes to watch for overbought and oversold conditions, while the CCI focuses on normal deviations from an asset's moving average price to spot divergences from normal trend cycles.

The RSI compares the relationship between the average of up-closes versus the average of down-closes over specific time intervals, usually 14 days. Values produced by its formula are then plotted on a moving line underneath the price chart. All readings oscillate between zero and 100, with a midpoint of 50, allowing for easy readings about potential overbought (above 70) and oversold (below 30) levels.

Originally developed to spot cyclical trends in commodities, the CCI has become popular in equities and currencies as well. The CCI's formula compares an asset's typical price to its moving average and then divides those by the absolute value of its mean deviation from the typical price. High positive readings signal that the asset is trading more strongly than its past trend cycles predict that it should. Low negative readings suggest that it is trading weakly. Unlike the RSI, the CCI does not have specific range bounds, which can make it more difficult to read.

Since both the RSI and CCI are momentum oscillators, they are able to signal bullish and bearish divergences. This occurs whenever new price peaks and valleys are not mirrored by corresponding momentum peaks and valleys. Such divergences highlight possible trend reversals. Generally speaking, the RSI is considered a more reliable tool than the CCI for most markets, and many traders prefer its relative simplicity.

RELATED FAQS
  1. What are the main differences between Williams %R oscillator & The Relative Strength ...

    Learn about the Williams %R indicator and how this momentum oscillator differs from the relative strength index (RSI) both ... Read Answer >>
  2. What are the top technical indicators used for range-bound trading strategies?

    Learn how to identify when a market is range-bound and what some of the technical indicators are that work best for trading ... Read Answer >>
  3. How do I build a trading strategy with the Chande Momentum Oscillator?

    Learn about the concepts behind Tushar Chande's momentum oscillator, including some simple steps you can use to help build ... Read Answer >>
  4. What Does it Mean to Use Technical Divergence?

    Divergence is definitely the most complicated indicator for the rookie technical trader. Read Answer >>
  5. Why is the moving average (MA) important for traders and analysts?

    See why the statistical concept of moving averages plays a central role for traders and chartists who rely on technical analysis ... Read Answer >>
Related Articles
  1. Investing

    Timing Trades With the Commodity Channel Index

    We introduce how to use the Commodity Channel Index, an oscillator that identifies cyclical trends, to determine buy and sell points.
  2. Investing

    How traders use CCI (Commodity Channel Index) to trade stock trends

    Learn how traders use the Commodity Channel Index (CCI) to evaluate buy and sell signals based on price trends over various timeframes.
  3. Trading

    Overbought or Oversold? Use the Relative Strength Index to Find Out

    Learn how to use the Relative Strength Index (RSI) for analysis and to generate buy and sell signals.
  4. Trading

    "Do The Right Thing" For Trade Breakouts

    Often in life, the right action is the hardest to take. Discover how to get on the right side of a trend.
  5. Investing

    Does the S&P Follow the Consumer Confidence Index?

    Are the ups and downs of the Consumer Confidence Index similar to those of the S&P 500?
  6. Trading

    Oversold Stocks in Uptrends (PGR, VNTV)

    These stocks are in uptrends, but recent pullbacks have put them into oversold territory on the RSI. Watch for a pop higher.
  7. Trading

    An Introduction to Oscillators

    Find out how this indicator may help improve the average investor's entry and exit points.
RELATED TERMS
  1. Oversold

    Oversold refers to a security that is trading below the true ...
  2. Trading Range

    A trading range occurs when a security trades between consistent ...
  3. Money Flow Index - MFI

    The Money Flow Index is a trading oscillator that incorporates ...
  4. Dynamic Momentum Index

    The dynamic momentum index is used in technical analysis to determine ...
  5. Ultimate Oscillator

    The Ultimate Oscillator is a technical indicator that was developed ...
  6. Trend

    The trend is the general direction of a market or of the price ...
Trading Center