Ultimate Algorithmic Trading System

Donald Lambert’s CCI—Commodity Channel Index
Donald Lambert developed the CCI in 1980, and it was featured in Commodities
magazine that same year. The Commodity Channel Index can be used in the same
vein as RSI and stochastic: trend determination or warning of extreme conditions.
Lambert originally developed CCI to identify cyclical turns in commodities, but the
indicator can be successfully applied to indices, ETFs, stocks, and other securities. In
general, CCI measures the current price level relative to an average price level over
a given period of time. CCI is relatively high when prices are far above their average,
and conversely, CCI is relatively low when prices are far below their average—hence
its application as reversion to the mean tool.
The main difference between CCI and other similar oscillators is that it is not
necessarily range bound. Most of the time, the CCI will oscillate between two
extremes, but as you will see in its calculations, there is not a fixed boundary. The
CCI introduces the concept of typical price and utilizes it in its calculations. Typical
price is just the average of a bar’s high, low, and close: Typical price (TP) = (High +
Low + Close)/3. This calculation looks at the three most important price points on
a price bar and many believe it reveals a more realistic picture of the day’s action than
just the close. The TP is also known as the daily pivot point. In the day, floor traders
used this easily calculable price to determine current support and resistance levels.
48
STOCHASTICS AND AVERAGES AND RSI! OH, MY!
Calculation for a 20-day CCI:
1. Going back in time, calculate the average of the past 20 days’ typical prices.
2. Calculate the one standard deviation of the average found in step 1. This is where
a computer/calculator comes in handy.
3. Divide the difference between today’s TP and the 20-day average of TP by the
product of the standard deviation times 0.015.
CCI = (Today’s TP − 20-day SMA of TP)∕
(20-day standard deviation ∗ 0.015)
Lambert set the constant at 0.015 in the denominator to ensure that approximately
70 to 80 percent of CCI values would fall between −100 and +100. Since the
numerator can be positive or negative, so can the CCI. The standard deviation
is inversely proportional to sample size; the larger the sample the smaller the
deviation. Since the standard deviation is in the denominator, a small lookback
period will cause a more volatile CCI. A shorter CCI (10 periods) will also produce a
smaller percentage of values between +100 and −100. Conversely, a longer CCI (40
periods) will have a higher percentage of values between +100 and −100.
Since this oscillator usually falls between +100 and −100 and is momentum
based, most traders will use it as an overbought/oversold indicator. However, since
www.rasabourse.com