Originally developed by Donald Lambert, The Commodity Channel Index (CCI) is an oscillator which has also been featured in his book “Commodities Channel Index: Tools for Trading Cyclical Trends”. The indicator, since its introduction, has grown in popularity and is now a very common tool for traders to identify cyclical trends not only in commodities but also equities and currencies. We’ll take a look at what exactly the CCI calculates, and how you can apply it to enhance your trading.
The one prerequisite to calculating the CCI is determining a time interval, which plays a key role in enhancing the accuracy of the CCI. Since it’s trying to predict a cycle using moving averages, the more attuned the moving average amounts (days averaged) are to the cycle, the more accurate the average will be. This is true for most oscillators. So, although most traders use the default setting of 20 as the time interval for the CCI calculation, a more accurate time interval reduces the occurrence of false signals. Here are four simple steps to determining the optimal interval for the calculation:
- Open up the stock’s yearly chart.
- Locate two highs or two lows on the chart.
- Take note of the time interval between these two highs or lows (cycle length).
- Divide that time interval by three to get the optimal time interval to use in the calculation (1/3 of the cycle).
The Commodity Channel Index is an extremely useful tool for traders to determine cyclical buying and selling points. Traders can utilize this tool most effectively by (a) calculating an exact time interval and (b) using it in conjunction with several other forms of technical.