Commodity Channel Index
The Commodity Channel Index measures the position of price in relation to its moving average. This can be used to highlight when the market is overbought/oversold or to signal when a trend is weakening. The indicator is similar in concept to Bollinger Bands but is presented as an indicator line rather than as overbought/oversold levels.
The Commodity Channel Index was developed by Donald Lambert and is outlined in his book Commodities Channel Index: Tools for Trading Cyclic Trends.
Trading Signals
Commodity Channel Index is best used in conjunction with trailing buy- and sell-stops.
Ranging Market
- Go long if the CCI turns up from below -100.
- Go short if the CCI turns down from above 100.
Trending Market
Divergences are stronger signals that occur less frequently. They are mostly used to trade intermediate cycles.
- Go long on a bullish divergence.
- Go short on a bearish divergence.
Example
IBM Corporation with 
14 day Commodity Channel Index. The days shown are the signal days. Trades are
entered using trailing
buy- and sell-stops on the day following.
S1: Go short - Commodity Channel Index turns down above the overbought line.
This trade is stopped out at the rally before S2.
S2: Go short - bearish divergence. This trade is stopped out during the
rally before S3.
S3: Go short - bearish triple divergence.
L1: Go long - Commodity Channel Index turns up from below the oversold line.
The next day closes below the low of the signal day, causing the trade to be
stopped out. A trailing buy-stop would stop us back in two days later.
S4: Go short - Commodity Channel Index turns down above the overbought line.
L2: Go long - Commodity Channel Index turns up from below the oversold line.
S5: Go short - Commodity Channel Index turns down above the overbought line
and bearish divergence occurs.
L3: Go long - Commodity Channel Index turns up from below the oversold line
and bullish divergence occurs.
?: The market is now trending (evidenced by the break above the previous high).
Do not go short when Commodity Channel Index turns down above the overbought
line - wait for a bearish divergence.
S6: Go short - bearish divergence.
S7: Even stronger signal - bearish triple divergence.
Setup
The default Commodity Channel Index is set at 20 days with Overbought/Oversold levels at 100/-100. To alter the default settings - Edit Indicator Settings.
See Indicator Panel for directions on how to set up an indicator.
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Commodity Channel Index Formula
The Commodity Channel Index calculation is fairly complicated. Here is the formula for 20-day CCI:
- Calculate Typical Price ("TP"):
(High + Low + Close) / 3 - Calculate TPMA: a 20-day simple MA of TP.
- Subtract TPMA from TP
- Divide the result by the following:
- Subtract today's TPMA from TP for each of the last 20 days.
- Sum the absolute values and divide by 20.
- Multiply the result by 0.015.
Any other time period (e.g. 10 days or 30 days) can be substituted for 20.
