Commodity Channel Index

The Commodity Channel Index (CCI) is an oscillator originally introduced by Donald Lambert in an article published in the October 1980 issue of Commodities magazine (now known as Futures magazine).

Since its introduction, the indicator has grown in popularity and is now a very common tool for traders in identifying cyclical trends not only in commodities, but also equities and currencies. The CCI can be adjusted to the timeframe of the market traded on by changing the averaging period.

Calculation

The CCI is calculated as the difference between the typical price of a commodity and its simple moving average, divided by the mean deviation of the typical price. The index is usually scaled by a factor of 1/0.015 to provide more readable numbers:

$CCI\; =\; frac\{1\}\{0.015\}frac\{p\_t\; -\; SMA(p\_t)\}\{sigma(p\_t)\}$,

where the p_t is the typical price (average of the high, low, and closing prices), SMA is the simple moving average, and σ is the mean deviation.

Interpretation

The Commodity Channel Index is often used for detecting divergences from price trends as an overbought/oversold indicator, and to draw patterns on it and trade according to those patterns. In this respect, it is similar to bollinger bands, but is presented as an indicator rather than as overbought/oversold levels.

The CCI typically oscillates above and below a zero line. Normal oscillations will occur within the range of +100 and -100. Readings above +100 imply an overbought condition, while readings below -100 imply an oversold condition. As with other overbought/oversold indicators, this means that there is a large probability that the price will correct to more representative levels.

Further reading

• Demonstration of calculation of Commodity Channel Index at analyzerxl.com

External links

• Commodity Channel Index buy and sell signals