Know your indicator - the CCI

[wayneL]

*A boring afternoon while I wait for Missus to come home from work.

There has been some talk of indicator trading and enthusiasm for same, especially in the "Daytrading" thread where there has been an emphasis on the Commodity Channel Index (CCI). CCI has also been popularized by Ken Wood (Woodie) where he has developed non-traditional interpretations of CCI patterns. www.woodiescciclub.com

I'm a big believer in "deconstructing" indicators to see what they are measuring, what they are REALLY saying about price movement so I thought I'd go through CCI first.

**********************

OK, building the indicator from scratch; let's say we are constructing a 20 day CCI. The first thing is the find the daily pivot point (i.e. (High + Low + Close)/3 ). Next we find the 20 day simple moving average of the daily pivot point. I'll plot these on a chart as we go along.

 

[wayneL]

Re: Know your indicator- the CCI

The next step is to create a simple oscillator from these two values.

i.e. Pivot Point - 20 day MA of pivot point.

This simple measures the distance between the 2 values. Notice the correlation between the Values on the price chart and the oscillator.

In the osillator, the 20 day MA becomes the zero line. Notice when the PP on the price chart crosses the 20MA is when the oscillator crosses the zero line.

Apologies if this is a bit basic for some.

 

[wayneL]

The next step is to find the 20 day "Mean Deviation" of the stock price. This is a measure of volatility very similar to "Standard deviation".

We divide the oscillator value by the mean deviation to "correct" the oscillator to be relevant to current volatility.

I have plotted both the mean deviation and the new oscillator on the chart.

Now we have the the precise shape of the CCI, just one more step and we're done.

 

[wayneL]

The last step is to index the CCI.

Lambert, (the creator of the CCI) wanted the values to be between 100 and -100 70% of the time, so he divided the oscillator value by 0.015 to achieve this aim.

We can plot the 100 & -100 lines on the oscillator for reference.

Now we have the finished CCI

 

[wayneL]

One can also get a make more of the CCI.

*Plot 200 and -200 for extreme readings.

*Include a histogram to make it more visually interesting and useful(?)

*Plus a few other ideas as per Woodies CCi Club

The interesting thing for me is that going through this process actually make me LESS likely to even look at the indicator.

Why?
1/ I know what it's measuring, so know what it is going to look like before even looking at it
2/ The raw price tell me what the CCI is measuring first, so why refer to the CCI?

Even so, I will look at it the odd time for reasons stated elsewhere.

There have been discussions for it's use elsewhere, but I'm sure others would like to show how they use it here as well.

Cheers

 

[wayneL]

Here is a link to Woodies CCI patterns FWIW.

http://www.trading-naked.com/woodie8_patterns.htm

NB I do not endorse Woodies methods, but just include them for interest and discussion.

Cheers

 

[wavepicker]

Hi wayne, I use cycles a lot in my work. The CCI is the only cycles based indicator, but in it's natural state it can be quite useless most of the time. I have modified it to help me with the my own cycles work. In the chart in the pane below the price action, is the dominant cycle(s) in the price action. There are various ways of determining this, however I use an FFT approach. In this case the the blue line represents the sum of the cycles greater than the span selected. The pane immediately below this is a CCI that I have modified to MIMIC the cycle(sum of the cycles)) in the pane immdeiately above in terms of shape. The interesting thing that is apparent here is that unlike most oscillators, these curves look more like slightly skewed sine waves which makes long and short opportunties much easier to identify. They are smooth and don't wiggle as much, thus reducing being whipsawed. It also aids in determining when a trend is at risk of ending. The bottom pane is once again for comfirming the upper panes and is a modified slow stochastic ( with span matching the cycle determined and with greater %D). The vertical lines are the cycle lengths, they can change slightly as time goes forward, but knowing the length of the cycle too, can help in identifying when a new one maybe about to start or end.

The problem with conventional CCI and most oscillators is that they can stay in"overbought" and "oversold" territory for very long times, especially if the trend is strong and are pretty useless. Still have much work to do but so far looking very promising.

Cheers

 

[wayneL]

The problem with conventional CCI and most oscillators is that they can stay in"overbought" and "oversold" territory for very long times, especially if the trend is strong and are pretty useless. Still have much work to do but so far looking very promising.

Cheers

HI Wavepicker

Boy do I agree with that. Overbought/sold aren't even in my vocabulary (as far as oscillators are concerned anyway). The conventional interpretation pretty much sucks for sure.

I like "outside the square" thought such as how you are using CCI however, and thats why I thought I'd open this thread:
1/ Show beginners how it works
2/ Prompt people to refer to price action more than oscillators
3/ Encourage some innovation.

Hope some more folks join in.

Cheers

 

[motorway]

One can also get a make more of the CCI.

*Plot 200 and -200 for extreme readings.

*Include a histogram to make it more visually interesting and useful(?)

*Plus a few other ideas as per Woodies CCi Club

The interesting thing for me is that going through this process actually make me LESS likely to even look at the indicator.

Why?
1/ I know what it's measuring, so know what it is going to look like before even looking at it
2/ The raw price tell me what the CCI is measuring first, so why refer to the CCI?

Even so, I will look at it the odd time for reasons stated elsewhere.

There have been discussions for it's use elsewhere, but I'm sure others would like to show how they use it here as well.

Cheers

Hi Wayne... I can not see anything in any of the examples that can not be seen better in the price series..

To make this standout starkly... I think if you draw some valid straight edges... ( Some trend channels ) and keep then sensitive to the true trend.

You have a much a live accurate graphic representation of
trend , momentum , overbought oversold and practically everything else..

add in volume and and thrust and reaction.. You have the everything else...Add in comparative relative strength and that's about it.. what's left for an indicator ( that needs to be optimised to the past ) to reveal ?..
The price series is the real thing... Not optimized and not static with a fixed look back period..

I would be interested if you had found an indicator that is a must have and a must look at ?

What is moving an indicator as often as a real change of behavior , is the fact that data is dropping off the at the rear.. The indicator will change simply because a day has passed not because anything might have happened..

Nothing will respond to new information faster than price and volume.

The action in a trend is always changing speeds and duration..
An indicator needs to know what the look back period should be for the next phase of the action.. How far a part are the next two rally peaks..

Nice work Wayne
motorway

 

[joea]

Hi.
Indicators in charting software vary to some degree in how they are displayed..
CCI is and indicator I utilise.

In "Fibonacci Trading" the author has a chapter on The Ideal Trade Setup.
Four elements need to be in agreement.
She uses a 3 or 5 minute chart together with CCI, Fibonacci and a 34 EMA.
I use this set up as a strategy but with longer term periods.

I was recently redirected to www.naked-trading.com/CCI_Setups_by_Fitzy.htm
The following setups were explained... with charts.
1 Regular Diverence (against the trend)
2 Reverse or Hidden Divergence (with the trend)
3 Trendline breaks (on the CCI)
4 Zero line rejection or crosses
5 The slingshot pattern
6 Extreme trades.

My CCI indicator can display three periods, so is appropiate for the above.

I see references above have been made to Woodie as well.

Just thought this may help SOME traders in the New Year.

Cheers

 

[pixel]

Hi.
Indicators in charting software vary to some degree in how they are displayed..
CCI is and indicator I utilise.

In "Fibonacci Trading" the author has a chapter on The Ideal Trade Setup.
Four elements need to be in agreement.
She uses a 3 or 5 minute chart together with CCI, Fibonacci and a 34 EMA.
I use this set up as a strategy but with longer term periods.

I was recently redirected to www.naked-trading.com/CCI_Setups_by_Fitzy.htm
The following setups were explained... with charts.
1 Regular Diverence (against the trend)
2 Reverse or Hidden Divergence (with the trend)
3 Trendline breaks (on the CCI)
4 Zero line rejection or crosses
5 The slingshot pattern
6 Extreme trades.

My CCI indicator can display three periods, so is appropiate for the above.

I see references above have been made to Woodie as well.

Just thought this may help SOME traders in the New Year.
Cheers

Hello Joe,

Interesting link you posted there;
when I simply clicked on the URL, all that showed was a 404 error (no such address)
"Aha!" I thought - and deleted the hyphen between naked and trading.
Result was an even more "interesting" site. But it too had nothing to do with CCI - unless you mean "see, see, eye!"

 

[colion]

There is a typo in the URL:

www.trading-naked.com instead of www.naked-trading.com

 

[joea]

Hello Joe,

Interesting link you posted there;
when I simply clicked on the URL, all that showed was a 404 error (no such address)
"Aha!" I thought - and deleted the hyphen between naked and trading.
Result was an even more "interesting" site. But it too had nothing to do with CCI - unless you mean "see, see, eye!"

Sorry I stuffed up.
Colion has corrected it.
I did a post yesterday to correct, submitted it and checked this morning to see it had disappeared..
I have had satellite conection problem, but I also will read the "how to do section".
Cheers.