The Commodity Channel Index Technical Indicator
Posted by Edward Dy on July 4th, 2008
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Photo credit forexfolks
The Commodity Channel Index is a tool for measuring the point at which cyclical price reversals for a particular asset can be expected. Among the primary assumptions behind the CCI is that price trends will tend to reverse at regular intervals within a particular asset. This will allow investors to take the correct action when the CCI indicates that one of those cyclical reversals is bound to occur.
The CCI is first calculated by averaging the high, low and closing prices into a measure coined as the True Price, or TP. A 20-period moving average of the TP will then become the Simple Moving Average of the True Price, or SMATP. A standard deviation of the difference between SMATP and TP over twenty periods will also be taken. The difference then between TP and SMATP will then be divided by the product of this standard deviation and 0.15, which is a constant value, in order to produce the CCI.
By utilizing the constant the .015 constant value will make sure that that most of CCI values will be within 100 and -100. In case the CCI’s absolute value will be greater than 100, Lambert’s theory indicates that the market is nearing one of its cyclical reversals, and that traders should take an action that is appropriate. The CCI will also help determine overbought and oversold levels, which are any levels where the absolute value is more than 100. If the CCI goes beyond the -100 to 100 boundary range and then returns, what is generated here can either be a buy or sell signal, depending on whether the CCI was less than -100 (oversold) or greater than 100 (overbought).
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