CCI: The Commodity Channel Index (CCI) is an oscillator developed by Donald Lambert in 1980. It is based on the notion that as an equity tops or bottoms the volatility decreases. Lambert was struck by the fact that an equity can resemble a sine wave as it moves between highs and lows. The observation is obviously most valid when an equity is in a price channel. The CCI takes advantage of cycles — if the trader can see a cycle then CCI can be “tuned” to fit into it.

CCI relates to stochastics because they are both looking at how price reacts to range. CCI is a measure of volatility. The closer the analyst can see a cycle, the more powerful CCI will be. If you pick n as number that is too big you stand the risk of incorporating cycles that are going to have CCI with a mean absolute deviation that is so large, CCI is almost always less than 100. If n is too small then CCI will be exceeding 100 too often. —Dennis Peterson, 2000