Commodity Channel Index (CCI): Analysis, Calculation, and Trading Application

Introduction to the Commodity Channel Index (CCI)

The Commodity Channel Index (CCI) is a technical analysis indicator developed by Donald Lambert. CCI is classified as an oscillator, meaning its values oscillate around a zero line and theoretically have no upper or lower limits. CCI measures the deviation of an asset's price from its average value over a specific period.

Purpose of CCI

CCI is used to identify trading cycles, overbought and oversold levels, and potential trend reversals. It is particularly useful in the analysis of commodities but can also be applied to other types of assets such as stocks or currencies.

How to Calculate CCI

The calculation of CCI involves several steps:

1. Typical Price (TP): Calculate the typical price as the average of the high, low, and closing prices.

   TP=(High+Low+Close)3TP=3(High+Low+Close)​

2. Simple Moving Average of the Typical Price (SMA of TP): Calculate the simple moving average (SMA) of the typical price over a specified period, typically 20 days.

   SMA(TP,n)=∑TPnSMA(TP,n)=n∑TP​

3. Mean Deviation: Calculate the mean deviation of the typical price over the specified period.

4. CCI: Based on the typical price, its moving average, and the mean deviation, calculate CCI using the following formula:

   CCI=TP−SMA(TP)0.015×MeanDeviationCCI=0.015×MeanDeviationTP−SMA(TP)​

This formula normalizes the…