## Monday, September 2, 2013

### How the commodity channel index works

The commodity channel index (CCI) is one of many financial techniques that have been developed by mathematicians, economists, and financial analysts within the last few decades. The commodity channel index is used to assist with predicting stock price and other financial instruments movement. The Commodity Channel Index (CCI) is one such technique and was first introduced in 1980 by a man named Donald Lambert.

The CCI is a mathematical indicator that measures price oscillations around an average stock price and uses a range from -100 through +100. Prices closer to +100 in the range indicate more buying of a commodity and prices closer to the -100 point in the CCI range indicate more selling has taken place.

## Why the commodity channel index is useful

The commodity channel index is useful for day traders because they can monitor the stock price in relation to the commodity channel index to see if prices suitably positioned for a possible trade. In any given day of trading a stock price may move into and out various points within the commodity channel index range which helps the trader navigate price movements. The CCI is considered beneficial in the following ways:

• Can be used across securities markets including stocks, commodities, and foreign exchange.
• Is readily available in software applications and presented in graphical format.
• Indicates where a securities price stands in relation to CCI range.
• Points out where a stock, commodity or other security may be overbought or oversold.
• Provides an ongoing measurement throughout the trading day.

## How the commodity channel index is used

The commodity channel index is used by calculating 2-3 equations on an ongoing basis. These equations are the moving average, and 1-2 long term commodity channel index equations. The moving average is used in determining an average security price over a period of time and the commodity channel index is used to both establish a range of high, low and middle points for the securities price and where within the range a current stock or commodity price is. The results of these equations are often presented in the form of line graphs alongside the actual historical price movement of a security.

Calculating the commodity channel index

If one's computer, spreadsheet application or technical analysis software is not working one may find themselves in the position of having to calculate the CCI manually. Performing the manual calculations may also assist in understanding the concepts and reasoning behind the commodity channel index. The calculations are as follows:

The commodity channel index uses three sub equations in the main equation. Those equations are 1) average daily price, 2) moving average daily price and 3) mean deviation of price from the moving average daily price.

1. An average daily price is calculated using different price points in a day such as open, close and midday or high, low or close or high, low or open. All these values could also be used and it depends on which numbers one things are more accurate. The following is an example of the calculation. Open \$25.00+Midday 24.50 +Close 24.75=74.25/3=\$24.75. Thus \$24.75 is the average price for a day using open, midday and closing prices.

2. The moving average is determined by calculating the average daily price for a given number of days such as 60 days. These daily averages are then added and averaged themselves. For example, daily average day 1+ daily average day 2etc/ number of days=60. If the total of daily averages was 1650 then divided by 60 would yield a moving average number of \$27.50.

3. Price Mean deviation is the difference in a stock or commodities price from the moving average. Like the previous two calculations this is also an average but the numbers being averaged are the difference of a daily price average from the moving daily average. For example, if in 60 days this difference adds up to \$10.20, divided by 60=0.17 making the mean price deviation .17 cents.

4. Last the CCI is calculated by using #1 , #2 and #3 above by subtracting the moving average daily price from an average price on a particular day for which the trader wants the indicator for. This value is then divided by .015 multiplied by the mean deviation. Using our examples above we get the following using \$28.00 as our latest average day price.

CCI=Latest average price-Moving average price/ .015 * Mean deviation.
Note: (The .015 was included by Lambert in the calculation to allow for proximity to the 200 point scale so a majority of price values would fall within it.)

CCI=\$28.00-\$27.50/.015 *.17=.50/.00255=196.07
Thus our commodity channel index number is well over +100 indicating a potentially overbought position!

The Commodity Channel Index is one of many financial analysis tools available to day traders. This being the case it is often used alongside other useful indicators such as volume indicators, candlestick analysis, relative strength indicator and the zero line cross indicator. To use the CCI alone may not provide an adequate description of the price movement pattern that is being observed and therefore may at times if not often, be insufficient as price momentum indicator. Nevertheless,

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