Name, Sometimes Called:
Commodity Channel Index
Often abbreviated CCI
Brief Description:
CCI is a price oscillator used to find trend
changes and strength. It can also be used to find buy or sell points.
Definitions, Formulas:
A price oscillator, CCI can be useful in finding changes
in price trends
and strength. It can also be used to find buy or sell points. Despite
the word “commodity” in its name, the CCI can be applied to a wide
range of issues.
The “channel” is the range 100 to –100. Most of the CCI’s random
fluctuations should fall within that range. Movements outside the
range are assumed to be non-random, and may represent trading opportunities.
To calculate CCI, we use a cycle period (n) of 14 days. (Feel
free to skip this part, the CCI computation has twisted many a mind
into mush!)
First calculate the Mean Price (MP) for each day:
MPi = (Hi + Li
+ Ci) / 3
where
Hi = highest price for day i
Li = lowest price for day i
Ci = closing price for day i
Next, calculate the simple moving average SMA
of the mean prices for the period:
AM = SMA(14)(MP)
This means that for the first (n-1) days there can be no computed
CCI.
Then we need the absolute difference between the AM today and
the MP for today and for yesterday (day –1), the day before (day
–2) all the way back to one less than the number of periods (n-1).
For a 14-day CCI that would be day –13. We do that in two parts.
First part is to compute the DI for each day starting with today
and going back n-1 days.
For today DITODAY
= MPTODAY - AMTODAY
For yesterday DITODAY-1
= MPTODAY-1 - AMTODAY
. . .
For today-12 DITODAY-12
= MPTODAY-12 - AMTODAY
For today-13 DITODAY-13
= MPTODAY-13 - AMTODAY
Then we compute the Mean Deviation as the sum of the absolute
values of DI then divided by n:
MD = (
) / n
Which is
MD =
ABS ( DITODAY )
+ ABS ( DITODAY-1 )
+ ABS ( DITODAY-2 )
. . .
+ ABS ( DITODAY-12 )
+ ABS ( DITODAY-13 )
and all of that divided by n.
Finally,
CCITODAY = (MPTODAY
- AMTODAY ) / ( MD x 0.015 )
Where did that 0.015 come from?? To place 70 to 80 percent of
CCI values in the “channel” between +100 and –100, CCI creator Donald
Lambert selected the scaling constant 0.015.
Positive Development Calculation:
There are two points at which a new positive development
(NPD)
can occur: when CCI x+ 100,
and when CCI x+ 0.
If the positive development was when CCI x+
100, then it is no longer a positive development when CCI x-
100. If the positive development was when CCI x+
0, that is, crossed from negative to positive), then that positive
development is only positive for the single day.
If this TAI is still positive tomorrow, it will no longer be new,
but will be a cumulative positive development (CPD).
If this TAI was a new positive development (NPD)
yesterday, and is still positive today, then it becomes a cumulative
positive development (CPD).
History:
Donald Lambert introduced CCI in an article in Commodities
magazine (now Futures) in October 1980. The indicator is
based on the assumption that commodity prices are cyclical, with
highs and lows occurring at regular intervals. However, determining
the cycle length is separate from calculating the CCI. Lambert recommended
using one-third of a complete cycle (low to low or high to high)
as a period for the CCI.
Despite the word “commodity” in its name, the CCI can be applied
to a wide range of issues.
The “channel” is the range +100 to –100. Most of the CCI’s random
fluctuations should fall within that range. Movements outside the
range are assumed to be non-random, and may represent trading opportunities.
Hence the significance of crossing over zero: it is a movement out
of the non-random range. Similarly, crossing over 100 is significant
as a movement to a non-random range.
The chart below shows the CCI indicator indicating a short
term for IBM the night of 8/23/2000. The prediction was correct
and the price rose. About 9/2/2000 CCI indicated that this was no
longer a positive development. That prediction was also correct
and the price for IBM dropped over the next few weeks.
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