# Forex School Intermediate Level: Commodity Channel Index

The Commodity Channel Index (CCI) is an oscillator originally introduced by Donald Lambert,  in the 1980. CCI  is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. . It is based on the average of the deviation between the Moving Average and the Typical Price (Average of high, low and close).

In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. CCI can be used to identify oto identify periods where price is overbought and oversold – where the price is far from the Moving Average.

The CCI is calculated in the following way:

1. Calculate a 14-bars Simple Moving Average of the Typical Price. The Typical Price is defined as (High+Low+Close)/3.

2. Calculate the Mean Deviation of Typical Price and SMA of TP for the 14-bars.

3. Apply the following formula:

CCI = (Typical Price – SMATP) / (0.015 * Mean Deviation)

Practically, the CCI gives a numerical representation of standard deviation of price from its Simple Moving Average. Smaller CCI values indicate that price is closer to its Moving Average, and bigger CCI values indicate that price is more distant than its Moving Average.

Traders and investors use the Commodity Channel Index to help identify price reversals, price extremes and trend strength. As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment. It is often used for detecting divergences from price trends as an overbought/oversold indicator, and to draw patterns on it and trade according to those patterns. In this respect, it is similar to Bollinger bands, but is presented as an indicator rather than as overbought/oversold levels.

The CCI typically oscillates above and below a zero line. Normal oscillations will occur within the range of +100 and -100. Readings above +100 imply an overbought condition, while readings below -100 imply an oversold condition. As with other overbought/oversold indicators, this means that there is a large probability that the price will correct to more representative levels.

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