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Commodity Channel Index (CCI)

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Commodity Channel Index (CCI)

Commodity Channel Index (CCI)

Description

The Commodity Channel Index (also known as CCI) is a momentum indicator that was first introduced by Donald Lambert in 1980. It can be used either as an oscillator showing overbought and oversold levels, or as a trend indicator showing the beginning and end of trends. The CCI is calculated using the price, a simple moving average of the price, and a standard deviation around the price. The CCI displays the difference between the price and the simple moving average as a momentum line oscillating around a 0 (zero) line. A scaling factor is also used (0.015 by default), so that most of the values are between 100 and -100. The CCI is displayed on its own chart, separate from the price bars, and is the lower section in the chart shown above.

Calculation

  • Description: The CCI is the difference between the typical price and the simple moving average of the typical price, divided by the standard deviation of the typical price multiplied by the scaling factor.
  • Calculation:
        TP = ((H + L + C) / 3)
        TPSMA = ((TP1 + TP2 + TP3 + TP4 + ... + TPn) / n)
        SD = ((ABS(TP1 - TPSMA) + ... + ABS(TPn - TPSMA)) / n)

        CCI = (TPn - TPSMAn) / (SD * 0.015)

Trading Use

The CCI is used in several popular trading systems, and therefore has many different ways that it can be used in trading. It can be used as an oscillator, to identify an overbought level when the CCI is above 100, and an oversold level when the CCI is below the -100 line. The CCI can also be used to identify the beginning of a trend when the CCI crosses above the 100 line or below the -100 line, and the end of a trend when it crosses back over the line. The CCI is also used as a pattern indicator, where trades are entered and exited based upon the patterns created by the momentum line, and trend lines are drawn on the CCI instead of the prices.

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