COMMODITY CHANNEL INDEX (CCI)
Commodity Channel Index (CCI) developed by
Donald Lambert to identify cyclical behavior of commodity. It’s also
useful for Stocks. It’s derives by using statistical mean.
The Commodity Channel Index Commodity Channel Index (CCI) useful to
identify price reversals and it’s also generates buy | sell signals.
When Commodity Channel Index (CCI) goes above +100 it’s indicates
overbought & when Commodity Channel Index (CCI) comes below +100 it’s indicates stocks are
ready to fall and CCI goes below -100 it’s indicates stocks are
oversold & when its cross above -100 it’s indicates stocks are ready
to move up.
When Commodity Channel Index (CCI) gives positive divergence that’s a
good buy signal & when Commodity Channel Index (CCI) gives negative divergence it’s a sell
signal. You can try different Commodity Channel Index (CCI) period & find out which period
works better for you.
More details you can found in Oct-1980 issue of
Commodities Magazine article written by Donald Lambert
How to Calculate?
1) Decide the time period say 20 days
2) Calculate Typical Price
(H+L+C) / 3
Where H= High, L = Low, C = Close
3) Calculate TP for defined time period, here its 20 days
4) Calculate Avg of TP for defined time period
5) Calculate Mean Deviation for Defined period
6) Calculate the absolute values of difference between last period simple moving average
and TP for each of the +past defined period here 20 days.
7) Calculate mean deviation
Add all absolute values calculated above in stapes (6) and divide by defined period.
CCI = [ (TP - SMAOFTP) / (0.015)*(Mean
Divergence in the Commodity Channel Index (CCI):
A lower peak in the Commodity Channel Index (CCI) against higher highs in the stock market
called negative divergence and typically it's a Sell
A higher peak in the Commodity Channel Index (CCI) against lower lows in the stock market
called positive divergence and typically it's a Buy
To get good result with Commodity Channel Index (CCI) we need to use it with
other technical indicators like
Moving Average (MA)
On Balance Volume (OBV)
Percentage Price Oscillators (PPO)
Price Rate Of Change (ROC)
Relative Strength Index (RSI)
Stochastic Oscillator (STO)
Chaikin Money Flow oscillator (CMF).
When we use two or three technical indicators and in case of positive divergence and negative divergence it giving real good result, only you need to change time span and find out which is a better pair for you.