Module 6B: Indicators · Lesson 7 of 10 · Back to course
You’ve met RSI in Lesson 6B.2. The Stochastic oscillator and the Commodity Channel Index (CCI) are two more momentum indicators you’ll see on most platforms. We cover them together because they answer a similar question – is price stretched compared with its recent behaviour? – and because the biggest lesson is that you almost certainly don’t need all three.
What they are
Stochastic oscillator. Developed by George Lane in the 1950s. It shows where the latest close sits within the recent high–low range, on a scale of 0 to 100. Readings above 80 are traditionally called “overbought” and below 20 “oversold”. It has two lines: %K (the main line) and %D (a smoothed version of %K). A common setting is 14, 3, 3.
CCI (Commodity Channel Index). Introduced by Donald Lambert in 1980, originally for commodities, though it can be used on any market. It measures how far price is from its recent average, compared with how far it normally strays. It has no fixed range. Readings above +100 or below −100 are often treated as unusually strong moves. A common setting is 20.
How they’re calculated (in plain English)
Stochastic
- Find the highest high and lowest low of the last 14 candles.
- %K = (latest close − lowest low) ÷ (highest high − lowest low) × 100. A close at the very top of the range gives 100; at the very bottom, 0; exactly in the middle, 50.
- %D = a 3-period average of %K. (The “slow” Stochastic most platforms show also smooths %K itself over 3 periods first – that’s the second 3 in 14, 3, 3.)
CCI
- For each candle, work out the typical price: (high + low + close) ÷ 3.
- Work out the 20-period average of the typical price.
- Work out the mean deviation: on average, how far each of the last 20 typical prices was from that average (ignoring minus signs).
- CCI = (typical price − average) ÷ (0.015 × mean deviation). The 0.015 is a scaling constant Lambert chose so that most readings would fall between −100 and +100.
How they differ from RSI
| RSI | Stochastic | CCI | |
|---|---|---|---|
| Measures | Size of recent gains vs losses | Close’s position in the recent range | Distance from the recent average |
| Range | 0–100 | 0–100 | Unbounded (often ±100 to ±300) |
| Traditional extremes | 70 / 30 | 80 / 20 | +100 / −100 |
| Feel | Smoother | Faster, jumpier | Fast, can spike far |
Different maths, same family. Most of the time all three rise and fall together, because they’re all built from the same recent prices.
How traders use them
1. Pullbacks within a trend. In an uptrend, some traders watch for Stochastic to dip into the lower part of its range and turn back up as a sign the pullback may be ending. This is a timing idea used alongside a trend filter, as in the Moving Average Pullback Strategy.
2. Ranges. In clear sideways markets, Stochastic moving above 80 near resistance or below 20 near support is sometimes used as context – see the Support and Resistance Bounce Strategy. As with RSI, this falls apart when the range breaks.
3. CCI for strong moves. Some traders read a CCI move above +100 as a sign of an unusually strong push – sometimes as the start of a trend, rather than a reason to fade it. Others use ±100 as an “overstretched” warning. Two opposite readings of the same number is a good reminder that indicators don’t come with instructions.
4. %K/%D crosses. %K crossing above %D is a common “momentum turning” trigger. On short timeframes these crosses are very frequent.
5. Divergence. Both can show divergence with price – see Lesson 6B.9.
Common mistakes
- Running RSI, Stochastic and CCI together and treating agreement as confirmation. It’s one opinion, three times.
- Fading every 80 or 20 reading in a trend. Stochastic can stay pinned near 100 in a strong uptrend.
- Trading every %K/%D cross. On a 5-minute chart, that can mean dozens of trades a day – and dozens of spreads.
- Treating CCI like RSI. CCI has no ceiling; a reading of +250 isn’t “broken”, it’s just a big move.
- Changing settings until they fit last week. Curve-fitting again.
Example (illustrative numbers)
All figures are made up for teaching purposes. They aren’t real prices or a trade idea.
Stochastic on GBP/USD (1-hour):
- Highest high of the last 14 candles: 1.2800
- Lowest low of the last 14 candles: 1.2700
- Latest close: 1.2780
- %K = (1.2780 − 1.2700) ÷ (1.2800 − 1.2700) × 100 = 0.0080 ÷ 0.0100 × 100 = 80
The close is 80% of the way up the recent range – “overbought” by the traditional label. In a rising market, that may simply reflect the trend.
CCI on the FTSE 100 (daily):
- Latest typical price: 8,102
- 20-period average of typical price: 8,000
- Mean deviation: 50 points
- CCI = (8,102 − 8,000) ÷ (0.015 × 50) = 102 ÷ 0.75 = 136
Price is well above its recent average compared with normal swings. One trader might read that as strength; another as stretched. A written plan decides which reading, if either, matters to you.
The prop firm angle
Fast oscillators on short timeframes encourage overtrading – a common route into challenge drawdown and into breaking a firm’s rules on consistency or maximum trades. If you use Stochastic or CCI in a challenge:
- Pick one momentum oscillator, not two or three.
- Use it on the timeframe your plan specifies, and only alongside your trend filter and levels.
- Count how many signals it would have given you in a typical week on demo. If it’s more trades than you can manage calmly, it’s the wrong tool for you – see Trading Discipline.
Key takeaways
- Stochastic shows where the close sits within the recent high–low range (0–100; 80/20 traditional extremes).
- CCI shows how far price is from its recent average versus normal swings (no fixed range; ±100 common thresholds).
- RSI, Stochastic and CCI are all momentum oscillators – choose one.
- “Overbought” and “oversold” labels describe the past, not the future.
Quick quiz
- The 14-period range is 7,900 to 8,000 and the close is 7,925. What is %K? (25.)
- What is %D? (A short (usually 3-period) average of %K.)
- Does CCI have a maximum value? (No – it’s unbounded.)
- Why does using RSI, Stochastic and CCI together add little? (They’re all momentum oscillators from the same price data, so they mostly agree.)
- Name one risk of trading %K/%D crosses on a 5-minute chart. (Very frequent signals – overtrading and paying the spread many times.)
Key terms
Stochastic oscillator · %K and %D · CCI · Mean deviation · Overbought · Oversold · Overtrading · Also see Trading jargon in plain English.
Try this
On a demo chart, put RSI(14), Stochastic(14, 3, 3) and CCI(20) on the same 1-hour chart. Scroll through two weeks and mark every time one of them gave an extreme reading that the other two didn’t. You’ll probably find very few. Then remove two of them, keeping whichever one you find easiest to read.
FAQ
Is Stochastic better than RSI? Neither is better; they measure momentum slightly differently. Stochastic is usually faster and jumpier, RSI smoother. Pick one.
What does a CCI of +200 mean? That the typical price is unusually far above its recent average compared with normal swings. It doesn’t say what happens next.
What’s the difference between fast and slow Stochastic? Slow Stochastic smooths %K before calculating %D, making it less jumpy. Most platforms default to the slow version.
Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.