Introduction
The Commodity Channel Index (CCI) is designed to detect beginning and
ending market trends. The formula standardizes market prices so that the
trader can spot deviations from the market's trend more easily.
Proponents of this indicator say that 70% to 80% of all price
fluctuations fall within +100 and -100 as measured by the index. This is
akin to technical lore that most of the time, markets trade in a
sideways trend, or channels. However, when the indicator moves out of
this range, it is said that a trend is underway.
The calculation for CCI measures the average daily price's distance from
a moving average of average daily prices.
The trading rules for the CCI are as follows: Establish a long position
when the CCI exceeds +100. Liquidate when the index drops below +100.
For a short position, you use the -100 value as your reference point.
Any value less than -100 suggests a short position, while a rise above
-100 tells you to liquidate your short position.
Interpretation
Generally, followers of the CCI look to establish long positions when
the CCI exceeds the +100 level, indicating that prices are in a strong
up trend. Generally, most users of this indicator also try to look for
patterns within the indicator, such as higher highs, and also look for
CCI movements to be confirmed by general price readings as well.
Standard interpretation calls for long positions, once initiated on the
upward exceeding of the +100 level, to be held until the CCI falls back
below +85, at which time positions are exited as the market has stopped
trending upward.
Short positions are generally established when the CCI goes lower than
-100, indicating that prices are in a strong down trend. Like long
positions, most users of this indicator try to watch out for patterns
within the CCI itself to confirm the downward trend, and also look for
confirmation from lower prices on the chart itself.
Once a short position is established, the original interpretation of
this indicator calls for holding the position until the index climbs
above -85 to the upside, at which time short positions should be
covered.
The purpose of the CCI index is to try to keep you out of the market
during consolidation, or weak trending periods. By measuring the
difference average prices versus the mean average prices, this indicator
attempts to isolate only strongly trending markets, similar to momentum
and MACD.
In the Track ‘n Trade Pro CCI indicator pane, -100 is 33% of the window,
+100 is 66% of the window. Therefore, guides could be set at these two
points for ease in tracking CCI. We could also say that -85 would be
roughly 36%, and +85 would be roughly 64% of the window.
Example of the CCI in the Indicator Window:
Calculation
Parameters:
Period (20) - the number of bars, or period, used to calculate the
study.
Formula:
The proper calculation of the CCI requires several steps. They are
listed in the proper sequence below. You must first compute the typical
price, using the high, low and close for the interval. It is the simple
arithmetic average of the three values:
TP = (Hight + Lowt + Closet) / 3
TPt: Represents the typical price.
Hight: The highest price for this interval.
Lowt: The lowest price for this interval.
Closet: The closing price for this interval.
Next, you calculate a simple moving average of the typical price for the
number of periods specified:
TPAVGt = (TP1 + TP2 +... + TPn) / n
TPAVGt: The moving average of the typical price.
TPn: The typical price for the nth interval.
N: Number of intervals for the average.
The next step is rather complex; it computes the mean deviation. The
formula is:
MDt = (|TPAVG1 - TP1| +... + |TPAVG1 - TPn |) / n
MDT: The mean deviation for this interval.
TPn: The typical price for the nth interval.
N: Number of intervals.
Note: The symbol | | designates absolute value. In mathematical
terms, negative differences are treated as positive values.
Now, the computation for the final CCI value is:
CCIt = (TPt - TPAVGt) / (.015 * MDT)
CCIt: The Commodity Channel Index for the current period.
TPt: The typical price for the current period.
TPAVGt: The moving average of the typical price.
.015: A constant.
MDT: The mean deviation for this period.
Customizing
To change the settings of this indicator, open the Program Options
screen by clicking the "Program Options" button located on the main
Toolbar.
See the Program Options section for more details.
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