|  APR 1986

Trading Channels

Introduction You don't have to examine price charts very long before you can picture the prices varying around a trendline in a trading channel, having the trendline reverse, and the trading within the channel begin all over again. We will describe two methods that can help visualize the channels and identify the price turns that comprise the channel edges. The first of these is the Commodity Channel Index (CCI) that measures the price excursions from the mean as a statistical variation. The second method brackets the price trading channel that is centered on a best-fitting straight trendline. Both approaches are included in the BASIC program listing so that their effects can be compared (Figure 6). The program is usable for your daily trading with a simple conversion of daily prices into the program variable format. Commodity Channel Index (CCI) The CCI was first described by Donald Lambert (Commodities, October 1980, pp. 39-40). He described the index to be like a "standard score" in statistics. The basic approach is first to calculate the average price value using a moving average. This establishes the center of a kind of trendline. Then, the mean deviation from the trendline is calculated. The final step computes the daily difference from the moving average as a ratio to the mean deviation. The ratio is divided by the constant .015 so that 70 to 80 percent of the variation falls within a +/– 100 percent channel index

by John F. Ehlers