Indicators serve as signals after writing so many articles about ’em. So, I am making my first move in analyzing the commodity channel index, abbreviated as CCI. This indicator was developed by Donald Lambert. This is one of the most used indicators and used for a different purpose than it’s original use.
CCI was initially used to identify the most recent trends, or rather new trends, however, a lot of traders these days use it to measure the current price levels compared to the average one. It is imperative to understand how each indicator works, thus the Commodity Channel Index, often abbreviated as CCI, it is an indicator which oscillates around a line – this line is said to be a naught line, this naught line stays within the negative (-) 100 to positive (+) 100 range.
Oscillators will always show some kind of indication, especially the lines that are usually within the charts. In this case, the naught line shows the level of Avg. balanced price. So the naught line will either sway to the negative area or the positive area – if it plunges toward the negative area – suggests a potential growth in the price, and the positive area indicates an overvalued security – It is important to look the critical values as well as crossing directions before making a conclusion as to which direction the market will go – remember that the unbalanced price alone is not enough for any conclusions and so here are some of the value levels and crossing directions to look at:
- If the naught line crosses past the 100 level (In this case it is most likely that the movement will continue to go upwards)
- If the naught line decreases past the 100 level (In this case it is most likely that the movement will return making U-turn, thus this suggests or rather serves as a signal to sell)
- If the naught line decreases past the -100 level (In this case it is most likely that the movement will continue to go downwards)
- If the naught line exceeds past the -100 level (In this case, it is most likely that the movement will return making a U-turn, thus this suggests or rather serves as a signal to Buy)
- From what you will see on the chart, a clear confirmation to buy is seen when crossing the naught line upwards from below.
- From what you will see on the chart, a clear confirmation to sell is seen when crossing the naught line downwards from above.
Calculations of CCI
Covering a few basics of CCI calculations :
- Each Period’s (HIGH + LOW + CLOSE) / 3 = Typical Price
- n-period is calculated by moving the Avg. of the typical price(i)
- (1) – (2) = n-Days CCI (To calculate a 3-Day CCI, you’d perform 3 substractions using today’s Step (2) value)
- Calculate the n-period simple moving average of the absolute values of each of the results in Step (3).
- Multiply the value in Step 4 by 0.015.
- Subtract the value from Step 2 from the value in Step 1.
- Divide the value in Step 6 by the value in Step 5.