What Is the Commodity Channel Index?
Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can identify a new trend or warn of extreme conditions.
Although the CCI was initially created by Lambert to detect cyclical shifts in commodities, stocks, ETFs, indexes, and other instruments can also benefit from using the indicator. Generally speaking, CCI compares the present price level to the average price level over a specified time period. When prices are much above their average, the CCI is generally high; when prices are significantly below their normal, the CCI is relatively low. In this way, overbought and oversold levels can be determined using CCI.
Calculating the CCI
The example below is based on a 20-period Commodity Channel Index (CCI) calculation. The number of CCI periods is also used for the calculations of the simple moving average and Mean Deviation.Copy
CCI = (Typical Price - 20-period SMA of TP) / (.015 x Mean Deviation)
Typical Price (TP) = (High + Low + Close)/3
Constant = .015
There are four steps to calculating the Mean Deviation:
First, subtract the most recent 20-period average of the typical price from each period's typical price.
Second, take the absolute values of these numbers.
Third, sum the absolute values.
Fourth, divide by the total number of periods (20). To guarantee that roughly 70 to 80 percent of CCI values would fall between -100 and +100, Lambert placed the constant at.015 on the scale. The look-back period also affects this proportion. With a lower proportion of values falling between +100 and -100, a shorter CCI (10 periods) will be more volatile. On the other hand, the proportion of values between +100 and -100 will be higher for a longer CCI (40 periods).
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