Stock Trading Signals and CCI

Stocks and Commodity Cycles. Merchandise Channel Index (CCI) was created by Don Lambert. It is used to detect when the loop starts and ends. Therefore, it has been widely used as a trading signal generator for stocks and commodities.

Even inexperienced observers are aware that stocks exhibit cyclical and trend behavior patterns. Obviously, the trader wants to buy early when the stock starts, and sell when the trend ends. CCI can help to detect these trends. It checks the current price based on past prices and does not use any weighting factor that artificially distorts the original data. For example, it uses simple averaging rather than overweighting data at one end of the measurement period, such as on a weighted moving average or exponential moving average. Comparing the current price to a simple moving average also provides a move reference point that always reflects the current condition without offsetting it. The CCI equation has a divisor that adjusts to reflect price variability. The divisor is smaller when the stock is non-trend (when the stock exhibits less variability) and when there is a breakout (when the stock shows large variability). Therefore, it reflects the price volatility of prices and patterns. In statistics, such numbers are called "variability measures".

"Current price" is not the closing price, but the average of high, low and closing prices. The divisor (or "measure of variability") is the average of the moving average of the "current price" from the "current price" during the measurement. The CCI calculation is scaled so that 70% to 80% of the random fluctuation falls between -100 and +100.

When Don Lambert developed the CCI, the measurement cycles were tested for 5 days, 10 days, 15 days, and 20 days. In spite of the fact that shorter cycles such as the detection of a 10-day CCI are good for various trend lengths, it is not good to detect "breakouts", he argues. Most indicators give an exit signal at extreme prices. On the other hand, the CCI gives an exit signal at or before the extreme price of the abnormal frequency. In order to avoid excessive frostbite, it is possible for Lambert to take 20 days as the standard measurement period in a shorter measurement period. However, traders are encouraged to experiment to find the period that best suits them. Many traders prefer to use a combination of 14 days, some prefer to use the period. Lambert suggests that the period chosen should be less than one-third of the cycle length (cycle length is twice the trend length). This means that the ideal CCI measurement will be less than 2/3 of the trend length. For example, the standard 20-day period is one-third of a 60-day period with a 30-day uptrend and a 30-day down trend. Thus, a 20 day period is most effective for a trend of more than 30 days. You must determine for yourself the trend duration of the CCI to be optimized.