The Commodity Channel Index, CCI, is designed to detect beginning and ending market trends. The computational procedure standardizes market prices much like a standard score in statistics. The final index attempts to measure the deviation from normal or major changes in the market's trend.

According to the original author, 70% to 80% of all price fluctuations fall within +100 and -100 as measured by the index. A thorough discussion of the Commodity Channel Index can be found in the October 1980 edition of Commodities magazine (now Futures).

The trading rules for the CCI are as follows. Establish a long position when the CCI exceeds +100. Liquidate when the index drops below +100. For a short position, you use the -100 value as your reference point. Any value less than -100, e.g. -125, suggests a short position, while a rise to -85 tells you to liquidate your short position.

Parameters:

• Period (20) - the number of bars, or period, used to calculate the study.

Computation

The proper calculation of the CCI requires several steps. They are listed in the proper sequence below. You must first compute the typical price, using the high, low and close for the interval. It is the simple arithmetic average of the three values.

The formula is:

TP = (Hight + Lowt + Closet) / 3

• TPt represents the typical price.
• Hight is the highest price for this interval.
• Lowt is the lowest price for this interval.
• Closet is the closing price for this interval.

Next, you calculate a simple moving average of the typical price for the number of periods specified.

TPAVGt = (TP1 + TP2 +... + TPn) / n

• TPAVGt is the moving average of the typical price.
• TPn is the typical price for the nth interval.
• n is number of intervals for the average.

The next step is rather complex; it computes the mean deviation. The formula is:

MDt = (|TP1 - TPAVG1| +... + | TPn - TPAVGn |) / n

• MDT is the mean deviation for this interval.
• TPn is the typical price for the nth interval.
• TPAVGn is the moving average of the typical price for the nth interval.
• n is number of intervals.

The symbol | | designates absolute value. In mathematical terms, negative differences are treated as positive values. Now, the computation for the final CCI value is:

CCIt = (TPt - TPAVGt) / (.015 * MDT)

• CCIt is the Commodity Channel Index for the current period.
• TPt is the typical price for the current period.
• TPAVGt is the moving average of the typical price.
• .015 is a constant.
• MDT is the mean deviation for this period.