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Commodity Channel Index

Commodity Channel Index

Commodity Channel Index Technical Indicator (CCI) measures the deviation of the commodity price from its average statistical price. High values of the index point out that the price is unusually high being compared with the average one, and low values show that the price is too low. In spite of its name, the Commodity Channel Index can be applied for any financial instrument, and not only for the wares.

There are two basic techniques of using Commodity Channel Index:

  1. To find divergences
    The divergence appears when the price reaches a new maximum, and Commodity Channel Index can not grow above the previous maximums. This classical divergence is normally followed by the price correction.
  2. As an overbought/oversold indicator
    Commodity Channel Index usually varies in the range of ±100. Values above +100 inform about overbuying state (and about a probability of correcting decay), and the values below 100 inform about the overselling state (and about a probability of correcting increase).

Commodity Channel Index

Calculation

  1. Finding a typical price. You need to add the HIGH, the LOW, and the CLOSE prices of each bar and then divide the result by 3:
     
    TP = (HIGH + LOW + CLOSE) / 3
  2. Calculating the n-period Simple Moving Average of typical prices:
     
    SMA (TP, N) = SUM (TP, N) / N
  3. Subtracting the calculated SMA(TP, N) from typical prices TP of each of the previous n periods:
     
    D = TP - SMA (TP, N)
  4. Calculating the n-period Simple Moving Average of absolute D values:
     
    SMA (D, N) = SUM (D, N) / N
  5. Multiplying the resulting SMA (D, N) by 0.015:
     
    M = SMA (D, N) * 0,015
  6. Dividing M by D:
     
    CCI = M / D

where:

HIGH – the highest price of the bar;
LOW – the lowest price of the bar;
CLOSE – the close price;
SMA – Simple Moving Average;
SUM – sum;
N – number of periods used for calculation.