Investment Basics

The Commodity Channel Index or CCI was developed by Donald Lambert and introduced in 1980. It was originally designed to identify cyclical movements in the commodity market, however it is actually a versatile analytic technical tool.

CCI is an oscillating indicator and a momentum indicator. CCI is calculated using typical price and a simple moving average. Standard deviation is then added with a scaling factor of.015. The scaling factor confines approximately 70% to 80% of the indicators fluctuations between +100 and -100. The scaling factor of.015 was suggested by Donald Lambert.

The formula for the indicator is CCI=(typical price-SMA of typical price) / (.015xstandard mean deviation). The formula uses simple moving averages and typical price which is similar to average price. These unweighted variables produce a consistent evaluation of actual conditions in relation to historical price activity.

CCI is used to trade equities, currencies, and commodities. All chartable assets can be analyzed with this indicator. CCI oscillates above and below a zero line. Readings above +100 and below -100 are considered extreme. Various trading systems have been developed using the CCI. It is a versatile indicator capable of producing buy and sell signals in many different ways.

CCI can be used in various timeframes depending on the trade horizon of the individual investor. It can be used as an oscillator producing overbought and oversold signals. Price extremes tend to indicate trend reversals and this indicator can be very helpful in timing entry and exit signals.CCI can be used to identify divergence from the price chart.

Many traders make use of divergence in reversal and correction trading. Woodie's CCI utilizes chart patterns within the CCI graph itself. Other methods include drawing actual trend lines within the CCI graph. The Commodity Channel Index has been added to most charting programs available today.

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The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. This article has been prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security, currency, or asset. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.