Commodity Channel Index
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The Commodity Channel Index (CCI) is calculated as the difference between the price of a commodity and its simple moving average, divided by the standard deviation of the price. The index is usually scaled by a factor of 1/0.015 to provide more readable numbers. Therefore, it is essentially a MACD, normalized the deviation.
Since its introduction, the indicator has grown in popularity and is now a very common tool for traders to identify 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.
Like most oscillators in technical analysis, the CCI was developed to determine overbought and oversold levels. Although its value is based on closing prices, the indicator really measures the variation from the mean of the price over (N) periods, and thus a better classification for it would be momentum oscillators.
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 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.
Ricky Schmidt
February 26, 2007
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