Classic Techniques  |  JAN 1995

Defining The Commodity Channel Index by D.W. Davies

Defining The Commodity Channel Index by D.W. Davies Presented here are the ins and outs of the commodity channel index, as defined by creator Donald Lambert and modified by the author. The trials and tribulations of trading, the probability of ruin and the frustration of personal frailties lead most traders to pursue trading's Holy Grail - but the Holy Grail, like beauty, is in the eyes of the beholder. To Donald Lambert, trading's Holy Grail was to devise a technical tool that would identify the beginning and the end of cyclical and/or seasonal price trends and limit the possibility of losses. And so was born the commodity channel index (CCI). Relatively little has been written about the CCI, even though it is included in most analytical software with an assigned default value of 20. By studying and modifying Lambert's work on the CCI, I have managed to fashion his original, notable accomplishment to produce consistent profits. THE BIRTH OF THE CCI In October 1980, Donald Lambert published an article in Commodities entitled ""Commodity channel index."" The relevant theories, facts and recommendations of that article can be summarized as: l. Recognizing cyclical and seasonal commodity price activity. 2. Traders' difficulty in recognizing the beginning and end of such price cycles. 3. The presentation of CCI as akin to a ""standard score"" in statistics to be used as a timing tool to address that problem. 4. CCI is computed with typical price minus the moving average of typical price divided by the mean deviation of the typical price average times a constant (0.015).

by D.W. Davies