Education / Indicators / Commodity Channel Index


The Commodity Channel Index ("CCI"), developed by Donald Lambert, measures the variation of a security's price from its statistical mean. High values show that prices are unusually high compared to average prices whereas low values indicate that prices are unusually low. Contrary to its name, the CCI can be used effectively on any type of security, not just commodities.

There are two basic methods of interpreting the CCI:

• Looking for divergences. A divergence occurs when the security's prices are making new highs while the CCI is failing to surpass its previous highs. This classic divergence is usually followed by a correction in the security's price.
• As an overbought/oversold indicator. 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.

Calculation

The following are basic steps involved in the calculation:

1. 1. Add each period's high, low, and close and divide this sum by 3. This is the typical price.



2. Calculate an n-period simple moving average of the typical prices computed in Step 1.
3. For each of the prior n-periods, subtract today's Step 2 value from Step 1's value n days ago. For example, if you were calculating a 5-day CCI, you would perform five subtractions using today's Step 2 value.
4. Calculate an n-period simple moving average of the absolute values of each of the results in Step 3.
5. Multiply the value in Step 4 by 0.015.
6. Subtract the value from Step 2 from the value in Step 1.
7. Divide the value in Step 6 by the value in Step 5.
So the common formula looks like the following: