by Joe Ross
(Previously published in Futures Truth Magazine.)
Four Steps to Calculate CCI
1. Calculate the last period’s Typical Price (TP) = (H+L+C)/3 where H = high, L = low, and C = close.
2. Calculate the 30-period Simple Moving Average of the Typical Price (SMATP).
3. Calculate the Mean Deviation. First, calculate the absolute value of the difference between the last period’s SMATP and the typical price for each of the past 30 periods. Add all of these absolute values together and divide by 30 to find the Mean Deviation.
4. The final step is to apply the Typical Price (TP), the Simple Moving Average of the Typical Price (SMATP), the Mean Deviation, and a Constant (.015) to the following formula:
CCI = (Typical Price – SMATP) / (.015 X Mean Deviation)
CCI shows the relationship (expressed as the mean deviation) of today’s Typical Price to a moving average of Typical Prices. By measuring today’s Typical Price against a moving average of typical prices, we are in effect taking a measurement of volatility.
Now let’s see how to use this concept to stay with a trend.
Keep in mind that CCI varies from one software program to another, but then, of course, so does data vary some-what from one supplier to another. However, as long as CCI is consistent with the charts created by the soft-ware we are using, it is acceptable to take the signals generated.
Following are some illustrations to help clarify the concept.
The chart above is 5-minute chart spanning a time period of 3 days.
At “A” CCI is below the -100 line. Notice that the CCI curve rises above -100, then above 0, and finally, above the +100 horizontal lines. When we see such action by CCI, we should suspect a trend in the making. If we have other indications of a trend such as a technical study, or a 1-2-3 formation followed by a Ross hook, we should consider using CCI for our trailing stop.
Once CCI rises above the +100 (in the case above), we would resolve to hold our position until CCI once again touches the 0 line, or could be projected to touch 0 through the use of typical price calculations. A projection would indicate to us exactly at which price the value of CCI would touch 0, and we would plan to exit at that price. In this particular instance, CCI never again touched 0.
The chart above is a 5-minute chart spanning a time period of 3 days.
At “A” we see CCI crossing below the +100 line. Subsequently, it crosses through “0” and then -100 at “B.” This, combined with any other flters we may have, should alert us that a trend is in progress. Shortly after “B,” CCI touches “0,” but after that the trend begins in earnest. CCI never again touches “0” until “C.”
• CCI in and of itself is not a great indicator of the start of a trend. However, it offers an excellent alert that a trend may be forming once we see CCI crossing three horizontal lines.
• CCI should be filtered with at least one other method for confirmation of the trend. Any momentum indicator will do, because CCI is a volatility indicator.
• If we choose to not compute typical prices for purposes of CCI projection, simply exit the trade on the first bar after CCI touches “0.” Statistically, the results will be about the same as with the projection. For day traders, this may mean waiting an extra few minutes, depending upon the time frame in which the trading is done. However, for position traders this can mean an extra day or an extra week. Therefore, position traders, because they have the time to compute the projection, are probably better off doing so.
Stay tuned for the follow up posts on this excellent article!