Simple CCI Chart System called Buckets - SMA, Buy & Sell Triggers

The Commodity Channel Index (CCI), created by Donald Lambert about 35 years ago, was originally to help solve problems with engineering signals. The main use of CCI is as a momentum indictor to measure the deviation of the price from its statistical average.

The calculated CCI value is unbound and that moves above and below zero as the price changes relative to the average price. CCI values of +100 are typically considered to be overbought and values of -100 are considered as oversold.

CCI a good measure of momentum and can be used as a signal of changes in trends or swings. Generally a ‘sell signal’ occurs if stock price makes a new low below -100 and ‘buy signal’ occurs if the stock makes a new high above 100.

However, like any indicator used as a system the 'devil likes in the detail'. It is also hard to visualise what to look for on a chart when you are using the CCI indicator. Other signals and indicators are needed to use the CCI effectively.

This article describes a simple new way of using the CCI for charts called 'Buckets' which using SMA cross-overs to confirm the buy and sell signals.

The CCI can be used to show sign of accumulation above +100 and below -100
The CCI can be used to show sign of accumulation above +100 and below -100. Source: Public Domain
Visual method to show flow between bucks and trends change
Visual method to show flow between bucks and trends change. Source: Public Domain
The CCI moving through zero is the trigger for changes in the direction of the accumulation.
The CCI moving through zero is the trigger for changes in the direction of the accumulation. Source: Public Domain

Introduction to the Commodity Channel Index (CCI)

Like most oscillators, the CCI was invented to determine oversold and overbought levels as signals for changes in trends and it works best in trending markets. The CCI indicator resembles the Relative Strength Index (RSI) and Williams Percent R indicators. The CCI works by tracking the relation between moving average (MA) of the price and the price itself. These deviations are calculated statistically as normal deviations from average deviation. The formula is:

CCI = Typical Price - Simple Moving Average / 0.015 x Mean Deviation

The main variable to address is the time interval and the closer it is to the normal cycle or pattern of changes in prices the better it will work. Some people use multiple CCI with different time periods - say 5 and 20, or even longer. The shorter the time period the more sensitive the index will be, and the longer time will tend to filter out the noise. The default setting is 20. But experiment will various values so see what works best.

Buckets - A Way to Visualize and Trade with the CCI

As shown in the image the areas above +100 and below -100 can be regarded accumulation areas (Buckets). Most chart applications color these areas. These are the major points: