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

2. 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)

3. Sample

4. 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

5. Happy Place

6. 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

7. 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

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

9. 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

10. 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

11. Overbought / Oversold Crosses

12. 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

13. 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

14. CCIMA example #1

15. CCIMA example #2

16. 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!!!

17. 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

18. 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, me