Commodity Channel Index (CCI)
Commodity Channel Index (CCI) measures the price deviation of a particular instrument from its average traded price.
A very high index value (more than +100) indicates that the price is in the overbought area, and a very low value (lower than -100) indicates that the price is in the oversold territory.
Commodity Channel Index (CCI) calculations:
- 1) Find a typical price: add high, low and close of each bar and divide it by 3:
TP = (HIGH + LOW + CLOSE) / 3 - 2) Calculate the simple moving average of the typical prices over n-periods:
SMA (TP, N) = SUM (TP, N) / N - 3) Subtract SMA(TP, N) from the typical prices ( TP) of each preceding n periods:
D = TP - SMA (TP, N) - 4) Calculate simple moving average of the absolute D values over n periods:
SMA (D, N) = SUM (D, N) / N - 5) Multiply SMA (D, N) by 0,015:
M = SMA (D, N) * 0,015 - 6) Divide M by D:
CCI = M / D
Where:
- HIGH - bar high;
- LOW - bar low;
- CLOSE - close price;
- SMA - simple moving average;
- SUM - total amount;
- N - the number of periods used for the calculation.
Commodity Channel Index (CCI) signals:
- Bullish divergence / bearish convergence is the main signal. In distinction from other oscillators, Commodity Channel Index (CCI) is the most sensitive one, hence divergence / convergence is not always a signal of the weakness of the trend, but always quite accurately defines the beginning of the correction;
- Under flat conditions exit from the overbought / oversold territory is a sell (buy) signal.
Examples of CCI's bullish divergence / bearish convergence
