The Commodity
Channel Index (CCI) is an oscillator originally introduced by
Donald Lambert in an article published in the October 1980
issue of Commodities magazine (now known as Futures magazine).
Since its introduction, the indicator has grown in popularity
and is now a very common tool for traders in identifying
cyclical trends not only in commodities, but also equities and
currencies. The CCI can be adjusted to the timeframe of the
market traded on by changing the averaging period.
The CCI is calculated as the difference between the typical
price of a commodity and its simple moving average, divided by
the mean deviation of the typical price. The index is usually
scaled by a factor of 1/0.015 to provide more readable
numbers.
The Commodity Channel Index is often used for detecting
divergences from price trends as an overbought/oversold
indicator, and to draw patterns on it and trade according to
those patterns. In this respect, it is similar to
Bollinger Bands, but is presented as an indicator rather
than as overbought/oversold levels.
The CCI typically oscillates above and below a zero line.
Normal oscillations will occur within the range of +100 and
-100. Readings above +100 imply an overbought condition, while
readings below -100 imply an oversold condition. As with other
overbought/oversold indicators, this means that there is a
large probability that the price will correct to more
representative levels. |
