Commodity Channel Index – CCI

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Technical indicator which measures the deviation of instrument price from the average price is called Commodity Channel Index, CCI. Price is steep if indicator`s value is high, and vice versa, if index has low rate, then price is understated. Commodity Channel Index can be applied not only to goods, but also to financial instruments.

Commodity Channel Index can be used in two ways:

1. Divergence search

Commodity Channel Index can not get higher than previous maximum, so when the new maximal price is reached, divergence appears. There is often price correction after that.

2. Oversold/overbought indicator

Commodity Channel Index fluctuation occurs between +100 and -100. When the rate of indicator is higher than +100, it indicates the overbought condition (probability of recession) and when the value is lower than -100 it shows oversold condition (probability of uprising).

Calculation

1. To find 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. To calculate the n-period Simple Moving Average of typical prices.

SMA(TP, N) = SUM[TP, N]/N

3. To subtract the received SMA(TP, N) from Typical Prices.

D = TP – SMA(TP, N)

4. To calculate the n-period Simple Moving Average of absolute D values.

SMA(D, N) = SUM[D, N]/N

5. To multiply the received SMA(D, N) by 0,015.

M = SMA(D, N) * 0,015

6. To divide M by D

CCI = M/D

Where:

SMA – Simple Moving Average;

N – number of periods, used for calculation.

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