The Commodity Channel Index ( CCI) was developed by Donald Lambert. Initially, the Commodity Channel Index was created as an indicator for determining the turning points on commodity markets, but over time it became popular in the stock market and in the Forex market. The assumption on which the indicator is based is that all assets move under the influence of certain cycles, and the maxima and minima appear with a certain interval. CCI refers to the type of oscillators that measure the speed of the price movement.
First, a typical price (Typical Price) is calculated:
A simple moving average is calculated from the characteristic price:
The probable (median) deviation is calculated.
The formula for the CCI indicator itself will look like this:
For scaling purposes, Lambreth set the constant at 0.015 so that approximately 70 to 80% of the Commodity Channel Index values were between -100 and +100.
The CCI indicator oscillates above and below the zero mark. The percentage of Commodity Channel Index values that are between +100 and -100 will depend on the number of periods used to build it. The shorter (with fewer periods) CCI indicator will be more volatile, and less than its values ??will fall in the range between +100 and -100. Accordingly, the more periods will be used to calculate the CCI, the more percentages of the indicator values ??will be between +100 and -100.
The author himself recommended as the main parameter of the CCI indicator 1/3 of the full cycle (for example, from a minimum, to the next minimum or from a maximum to the next maximum).
For example. If the cycle of market fluctuations is 30 days, the recommended value for the CCI indicator is 10 days. Note: the very definition of the cycle length must be made independently of the Commodity Channel Index and other methods.
CCI is a sufficiently versatile indicator, capable of creating a wide range of signals for buying and selling. Traders and investors use the CCI to determine the reversal price points, extremes on the price chart and the strength of the trend. Like most CCI indicators, it should be used with confirmations from other techniques.
The author's recommendations for work The commodity channel index concerned movements that go above +100 and below -100 and give signals for buying and selling. Since 70 to 80% of the time CCI values are between the levels of +100 and -100, signals for buying and selling will appear 20 - 30% of the time.
The Commodity Channel Index is designed for cyclical markets and works well only when the market is really exposed to fairly constant cycles. In the Forex market cycles are difficult to recognize, so the optimal period of the CCI indicator is selected with great ddifficulty.
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