Do you want to know if your asset is overbought or oversold? Do you want to identify the market itself if it is in an overbought or oversold situation? In technical analysis, there are many tools that you can use to know that. This includes DCCI or dual commodity channel index. Does it sound familiar? If it does to you, you must know the popular commodity channel index because it is a variation. If you are interested in how to determine overbought and oversold situations, this is for you.
The construction of the dual commodity channel index
How is the construction of a DCCI? First, we need to graph a commodity channel index line smoothed along with an unsmoothed one that measures a similar commodity, financial security, or currency. If these two lines have a crossover, it is an indicator of potential buy and sell signals. On the other hand, if we see subsequent breaks in the price trend line, there are definite entry and exit points.
The DCCI and technical analysis
Technical analysis helps traders and investors develop better ideas and decisions. Technical traders maximize the use of charts and graphs in the process. Under technical analysis, we have tools like oscillators. Oscillators are indices that depend on a financial asset’s value. It is constructed to oscillate between two extreme values. The more the index is near the maximum value, the more it indicates that the asset is overbought, that the price is about to decline soon. The more the index gets close to the minimum value, the more the asset is oversold, and the price is about to increase soon.
Technical analysis: one of the three market analyses
Many technical traders prefer using the dual commodity channel index when they make trades. When we say technical analysis, we refer to historical price data when predicting future movements. Technical analysis is one of the three helpful market analysis out there. We also have sentiment and fundamental analysis. Many people support fundamental analysis, which has a different focus. For instance, we have company earnings, the company’s current state, political events, and much more information that does not concern a security’s price to identify undervalued and overvalued assets.
Technical analysis assumes that a massive portion of all available information about stocks, bonds, commodities, and currency is quickly incorporated into market forces’ prices. Hence, it is not profitable to make investment decisions if these are the only basis of information. Technical traders think that success lies in translating how many people think about the market into indicators that help them time their stock or security entry and exit.
How do we calculate the DCCI?
We can calculate the commodity channel index if we take the difference between the financial asset price at the moment and the simple moving average. Next, we divide that by the price’s mean absolute deviation. A dual commodity channel index has two CCI variations plotted. Hence, we call it dual. Because of this, the trader has a more extensive understanding of a financial asset’s momentum.
Let us have a recap
The DCCI is a technical analysis tool that helps identify if an asset is overbought or oversold. It is a variation of the popular commodity channel index. The DCCI is an oscillator that oscillates between two values. As it gets closer to the maximum value, the more the asset gets overbought. As it gets closer to the minimum value, the more the asset gets oversold.