The Commodity Channel Index (CCI), developed by Donald Lambert, is an indicator that follows trends. In general, the CCI measures the gap to a Moving Average, helping detect the beginning and the end of market trends. The CCI is calculated as the difference between the mean price of a share and the average price of the mean prices over a specified period. The result is then compared with the average difference over the period.
The formula for the CCI is:
The CCI is a lower technical study. ProSticks uses a default parameter value of 5 bars to calculate the CCI. 14 and 20 bars are also commonly used.
Values between +100 and -100 indicate a sideways market. Bullishness is confirmed when the index crosses +100 while dipping below -100 indicates bearishness in the market.
Traders usually go long when the price rises above +100 and will enter into a short position when the price dips below +100. Covering will occur if the price rises above +100 once more. Conversely, traders will go short when the price falls below -100 and will enter into a long position when the price rises above -100. Covering will occur if the price dips below -100 once more.