CCI Indicator
Hi there!
We are going to study today one of the popular indicators, the CCI indicator.
The CCI - Commodity Channel Index - indicator was developed by Donald Lambert in the early of 80s and it based on an observation that the market moves in cyclical movements which means high and low of the price are coming in periodic intervals and in consecutive fashion. So, if we can detect those cycles we can detect the beginning and the ending of the trend.
The CCI designed upon this observation to represent the position of current price relative to the average of price over a recent period.
The CCI is an oscillator that oscillates around a zero line without upper and lower limit; but the formula of the CCI indicator insures that the must of the CCI values would fall between -100 and +100 (Figure 1).
Formula:
The first step of calculating the CCI is getting the typical price:
TP = (HIGH + LOW + CLOSE)/3
Then we calculate the simple moving average of the typical price:
SMATP = SMA(TP,N)
Where N is the period used with CCI calculation.
The third step is calculation the Mean Deviation which the calculation of the absolute value of the subtraction the last period SMATP and the typical price of the last calculation period. The previous values divided by the calculation period.
Finally the CCI is calculated by this formula:
CCI = (TP - SMATP) / (.015 x Mean Deviation)
How to trade using CCI indicator:
The main usage of the CCI indicator is to indicate the overbought and oversold market. So, the best trade is the reversal trend trade.
When the CCI go above +100 line it means it’s an overbought mood and the trader have to wait the reversal of the trend and the CCI must went to below +100 line in order to take short.
When the CCI go below -100 line it means it’s an oversold mood and the trader have to wait the reversal of the trend and the CCI must went to above -100 line in order to take long.
Some of CCI users like to add +75 and -75 lines and they use these lines to exit the trade, some of them advice:
Close the short position when the CCI indicator go below the +75 line , 0 line and -75 line then go above one of them again.
And close the long position when the CCI indicator go above the +75 line , 0 line and -75 line then go below one of them again.
I think you have to use your other indicators to confirm the buy/sell/close signals generated by CCI indicator.
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