Commodity Channel Index (CCI) measures the price deviation of a particular instrument from its average traded price.
A very high index value (more than +100) indicates that the price is in the overbought area, and a very low value (lower than -100) indicates that the price is in the oversold territory.
Commodity Channel Index (CCI) calculations:
1) Find a typical price: add high, low and close of each bar and divide it by 3: TP = (HIGH + LOW + CLOSE) / 3
2) Calculate the simple moving average of the typical prices over n-periods: SMA (TP, N) = SUM (TP, N) / N
3) Subtract SMA(TP, N) from the typical prices ( TP) of each preceding n periods: D = TP - SMA (TP, N)
4) Calculate simple moving average of the absolute D values over n periods: SMA (D, N) = SUM (D, N) / N
5) Multiply SMA (D, N) by 0,015: M = SMA (D, N) * 0,015
6) Divide M by D: CCI = M / D
Where:
HIGH - bar high;
LOW - bar low;
CLOSE - close price;
SMA - simple moving average;
SUM - total amount;
N - the number of periods used for the calculation.
Commodity Channel Index (CCI) signals:
Bullish divergence / bearish convergence is the main signal. In distinction from another oscillators, Commodity Channel Index (CCI) is the most sensitive one, hence divergence / convergence is not always a signal of the weakness of the trend, but always quite accurately defines the beginning of the correction;
Under flat conditions exit from the overbought / oversold territory is a sell (buy) signal.
In order to add the Commodity Channel Index (CCI) indicator in MetaTrader 4, use the "Insert ->Indicators -> Trend -> Commodity Channel Index" menu sequence.
Examples of CCI's bullish divergence / bearish convergence
Warning: This document does not constitute an offer or a recommendation to enter into any transaction. All views and statements expressed are believed to be true and accurate when published. Any person relying on this information to trade does so entirely at his/her own risk. The markets can be very volatile. Prices may move rapidly against you, and past performance is not necessarily a guide to future performance.
