Commodity Channel Index

The Commodity Channel Index, developed by Donald Lambert, is a complex indicator that follows trends. Commodity Channel Index is designed to detect beginning and ending market trends. This study measures the distance between the share prices and their Moving Average, and thus allows a measurement for the trend strength and/or intensity.

 

The Commodity Channel Index is calculated as the difference between the mean price of a share and the average of the means over a chosen period. This difference is then compared with the average difference over the time period. For better comparison, the result is not to be understood as a barrier, but rather as an orientation point which is often overridden by peaks.

 

Pane: Bottom

 

Formula

 

The formula consists of several steps, listed below.

 

  1. You must first compute a typical price, using the high, low, and close for the interval. It is the simple arithmetic average of the three values.
     

    TPt = (Ht + Lt  + Ct ) / 3
     

    TPt = Typical price

     

  2. A Simple Moving Average of the typical price for the number of periods specified is calculated.
     

    TPAVGt  = (TP1 + TP2 +...+TPn) / n

    TPAVG    t = The Moving Average of the typical price
    TP    n = Typical price for the nth interval

     

  1. The mean deviation is computed next.
     

    MDt  = (|TP1 - TPAVG1|+...+|TPn - TPAVGn|) / n

    MD    t = The mean deviation for a specified interval
    TPAVG    n = the Moving Average of the typical price for the nth interval
    TP    n = The typical price for the nth interval
    n     = the number of intervals for the average

    The symbol "|" designates an absolute value. In mathematical terms, an absolute value is the value of a number without regard to its sign, i.e., the absolute value of -2 is 2; the absolute value of 2 is 2.

     

  1. The computation for the final CCI is
     

    CCIt  = (TPt  - TPAVGt ) / (0.015 x MDt )

    TP    t = The typical price for the current period
    0.015     = Constant
    TPAVG    t = The Moving Average of the typical price
    MD    t = The mean deviation for the specified period

 

Properties

 

High: The Symbol field on which the study will be calculated. The application uses the Aspect "High".

 

Low: The Symbol field on which the study will be calculated. The application uses the Aspect "Low".

 

Close: The Symbol field on which the study will be calculated. The application uses the Aspect "Close".

 

Period: The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. The application uses a default of 20, with 14 being another common setting.

 

Interpretation

 

This index, as suggested by its name, was designed for the futures market but is today also used for shares. The CCI is designed to detect beginning and ending market trends. This indicator measures the distance between the share prices and their Moving Average and thus allows a measurement for the trend strength and/or intensity. According to the developer, Lambert, values of +100 to –100 point to a market with no trends and thus do not supply any trade indicators. Also, according to Lambert, 70% to 80% or all price fluctuations fall within +100 and –100 as measured by the index. Buying and selling signals only occur when the +100 line (buy) and the –100 (sell) are crossed.

 

The trading rules for the CCI are as follows:

 

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