What Is DUAL Commodity Channel Index?
A dual commodity channel index (DCCI) is a tool used in technical analysis to identify when an asset or market is overbought or oversold. A dual commodity channel index is a variation on the popular commodity channel index, which is an indicator invented in 1980 by Donald Lambert to measure the variation in a commodity’s value from the statistical mean.
A dual commodity channel index is constructed by graphing a smoothed commodity channel index line along with an unsmoothed commodity channel index line measuring the same commodity, currency, or financial security. Crossovers of the two lines indicate possible buy and sell signals, while subsequent breaks in the price trendline indicate definite entry and exit points.
Understanding DUAL Commodity Channel Index (DCCI)
The dual commodity channel index is a technical analysis tool known as an oscillator, which is an index based on the value of a financial asset and constructed to oscillate between two extreme values. As the index reaches the maximum value, it indicates the asset is overbought and due to decline in price. As the index reaches the minimum value, it indicates the asset is oversold, and due to increase in price.
The commodity channel index is calculated by taking the difference between a financial asset’s current price and its simple moving average and then dividing that by the mean absolute deviation of the price. A dual commodity channel index plots two variations of CCI lines, giving traders an even more granular understanding of a financial asset’s momentum.
DUAL Commodity Channel Index and Technical Analysis
The dual commodity channel index is a favorite tool for investors who use technical analysis to make trades. Technical analysis involves the use of historical price data to predict future movements, and it differs from fundamental analysis, which examines information like a company’s earnings, the state of the economy, political events, and other information outside a security’s price in order to identify undervalued or overvalued assets.
Technical analysis operates under the assumption that the vast majority of available information about a stock, bond, commodity, or currency is almost instantaneously incorporated in the price by market forces, and therefore it isn’t profitable to make investment decisions based on this information. For technical traders, the key to investing success is translating the mass psychology of the market into indicators which enable them to time their entry or exit from a stock or security.