Commodity Channel Index (CCI) measures the price deviation of a particular instrument from its average traded price. A very high index value (more than +100) indicates that the price is in the overbought area, and a very low value (lower than -100) indicates that the price is in the oversold territory.
Commodity Channel Index (CCI) calculations:
Find a typical price: add high, low and close of each bar and divide it by 3: TP = (HIGH + LOW + CLOSE) / 3
Calculate the simple moving average of the typical prices over n-periods: SMA (TP, N) = SUM (TP, N) / N
Subtract SMA(TP, N) from the typical prices ( TP) of each preceding n periods: D = TP – SMA (TP, N)
Calculate simple moving average of the absolute D values over n periods: SMA (D, N) = SUM (D, N) / N
Multiply SMA (D, N) by 0,015: M = SMA (D, N) * 0,015
Divide M by D: CCI = M / D
HIGH – bar high;
LOW – bar low;
CLOSE – close price;
SMA – simple moving average;
SUM – total amount;
N – the number of periods used for the calculation.
Commodity Channel Index (CCI) signals:
Bullish divergence / bearish convergence is the main signal. In distinction from another oscillators, Commodity Channel Index (CCI) is the most sensitive one, hence divergence / convergence is not always a signal of the weakness of the trend, but always quite accurately defines the beginning of the correction; Under flat conditions exit from the overbought / oversold territory is a sell (buy) signal.
In order to add the Commodity Channel Index (CCI) indicator in MetaTrader 4, use the “Insert ->Indicators -> Trend -> Commodity Channel Index menu sequence.