Indicator of the month March 2009 Commodity Channel Index CCI Brian Leip

About the Indicator Type: Oscillator Created by Donald Lambert and first published in 1980 Originally designed to identify cyclical turns in commodities Despite the name, it is now widely used on most financial products (stocks, futures, forex, etc)

Sample

WARNING!!! UPCOMING MATH FORMULA If you’re not sure which is more painful, math or a root canal, please go to a happy place for the next few minutes

Happy Place

How to Calculate the CCI 4 Steps (assuming a 14 period CCI): Calculate the last period’s typical Price (TP). TP = (high + low + close) / 3 Calculate the 14 period simple moving average of the typical price (SMATP) Calculate the mean deviation. Do this by adding up the differences between the last period’s SMATP and the typical price for the past 14 periods. Then divide that by 14 Note: this is different from the standard deviation Multiply the mean deviation by 0.015 Note: This was done to shrink the mean deviation to a reasonable size. It ensures that 70% - 80% of values will range between -100 and 100

Sample Calculation (20 period) Date Open High Low Close TP SMATP(20) MnDev(20) CCI(20) 27-Mar-09 1,387.71 1,362.56 1,362.61 1,370.96 1,431.95 35.14 (115.71) 26-Mar-09 1,407.02 1,411.69 1,388.51 1,399.55 1,399.92 1,429.44 33.15 (59.37) 25-Mar-09 1,382.10 1,407.15 1,377.71 1,396.59 1,393.82 1,427.23 35.11 (63.44) 24-Mar-09 1,374.60 1,397.80 1,373.90 1,390.80 1,387.50 1,424.96 37.15 (67.23) 23-Mar-09 1,411.40 1,367.07 1,367.14 1,381.87 1,422.14 39.71 (67.61) 22-Mar-09 1,395.18 1,430.39 1,391.10 1,422.44 1,414.64 1,421.44 40.42 (11.21) 21-Mar-09 1,444.74 1,445.95 1,410.58 1,410.75 1,422.43 1,419.84 42.01 4.10 20-Mar-09 1,427.05 1,444.18 1,412.92 1,430.35 1,429.15 1,419.13 42.39 15.76 19-Mar-09 1,474.69 1,445.23 1,448.96 1,456.29 1,417.37 42.80 60.63

MATH PORTION IS NOW OVER You may now return from your happy place

What period to use 14 is the standard setting Donald Lambert, the creator of the CCI, recommended that you follow this method Look at a chart of the financial instrument you want to trade Find the high points and low points Get the average time frame for the low to swing to the high and visa versa Divide that time frame by 3

How to trade using the CCI There are a multiple ways to trade using the CCI Overbought / Oversold crosses Divergences Trendlines Today I will cover the overbought / oversold cross since it is the most popular method

Overbought / Oversold Crosses

Drawback Whipsaw Whipsaw is when the indicator moves back and forth rapidly across the overbought/oversold indicators This can be a quick way to lose any money that you have made previously

How to offset whipsaw Combine the CCI with a trend indicator (i.e. moving average crossover) Use the CCI as the entry signal, and stay in the trade until the trend indicator reverses Create a moving average of the CCI See examples on the next 2 slides

CCIMA example #1

CCIMA example #2

Summary Technical Indicator Type: Oscillator Best used to give an early indication of a trend reversal Determine period by using 1/3 of the average time between lows and highs on a chart Combine with a trend indicator and/or create a moving average on the CCI to avoid whipsaw Experiment with multiple strategies on different investment vehicles to find what works best for you BACKTEST, BACKTEST, BACKTEST!!!

FIN I hope you found this presentation useful Since there are so many indicators today, it can be overwhelming for those that are learning technical analysis I would like to invite someone else to present next month on a different technical indicator that they have found useful

Gift for the OC traders group The CCIMA with buy/sell indicators on the previous page is an indicator that I wrote in thinkscript. If you would like me to send you the code for your personal use, email me BrianLeip@gmail.com