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.

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**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.

• Helps traders determine possible entry and exit points for trading.

• Points out where a stock, commodity or other security may be overbought or oversold.

• Provides
an ongoing measurement throughout the trading day.

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**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.)

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,

Sources:

http://daytrading.about.com/od/indicators/a/CCI.htm

http://www.asx.com.au/research/charting/library/commodi ty_channel_index.htm

http://www.investopedia.com/term s/c/commoditychannelindex.asp

http://stockcharts.com/ school/doku.php?id=chart_school:technical_indicators :commodity_channel_index_cci

http://en.wikipedia.org/ wiki/Commodity_Channel_Index

http://www.asx.com.au/research/charting/library/commodi ty_channel_index.htm

http://www.investopedia.com/term s/c/commoditychannelindex.asp

http://stockcharts.com/ school/doku.php?id=chart_school:technical_indicators :commodity_channel_index_cci

http://en.wikipedia.org/ wiki/Commodity_Channel_Index

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