CCI - Commodity Channel Index

I've been trying out the CCI (Commodity Channel Index for those of you that like big words) recently and have to say it appears to be one of my favourite indicators that I've tried.

Looking at historical data with the CCI has proven to me that it's really quite accurate.

The Calculation

The Commodity Channel Index was designed to be most effective when the number of periods used is approximately 1/3rd of the number of periods in a cycle (low to low or high to high), so a cycle of 60 periods would use 20 periods for the CCI.

The formula is as follows:

(Typical Price - Simple Moving Average of the Typical Price) / (0.015 x Mean Deviation)

• The Typical Price is the average of the High, Low and Close (H+L+C)/3
• The Simple Moving Average of the Typical Price (more commonly known as SMATP) is pretty much what it says it is, the SMA of the Typical Price.
• The Mean Deviation is the difference between the last period's SMATP and the typical price for each of the past periods. Add all of these absolute values together and divide by the number of periods used to find the Mean Deviation.

How to use the Commodity Channel Index (CCI)

It's actually pretty easy to use, you end up with a second chart which fluctuates between negative and positive numbers. with important points being when the line crosses either the positive 100 line or the negative 100 line. When the CCI moves above 100 we want to go long. When it crosses below the 100 line we want to close our long positions. When the CCI crosses below the -100 line we want to open short positions. When the CCI crosses back above the -100 line we want to close our short positions.

In Practice 

Below I've included a daily chart of the AUD/JPY which illustrates how the CCI can be used to make some very nice gains.

AUD/JPY Daily chart showing the use of the Commodity Channel Index to determine when to open/close a position.

As you can see it works very nicely, particularly for long positions, from what I've experienced thus far it isn't quite as accurate with short positions, due to the speed of breakdowns it seems that it is all over by the time it crosses below the -100 line.

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