The Commodity Channel Index Indicator: On Computational Basics

Jul 24 • Forex Indicators, Forex Trading Articles • 1945 Views • 1 Comment on The Commodity Channel Index Indicator: On Computational Basics

It is only to be expected that beginners in forex trading would barely recognize the significance of the Commodity Channel Index Indicator. It is for this very reason that such individuals should immediately learn the basics of utilizing such an oscillator. Simply put, by getting a practical grasp of the various facets of the aforementioned trading tool, one would be able to identify cyclical trends accurately. Furthermore, upon becoming proficient in using the commodity channel index, one should be capable of taking advantage of emerging trends as well as avoiding considerable downswings.

Those yet to discover the sheer importance of the Commodity Channel Index Indicator should first understand the computational basics of the tool to finally realize why experienced traders often rely on it. The basic formula for the Commodity Channel Index requires four main values: the average price, the number of periods, the constant, and the mean deviation. As one might expect, it would be necessary to calculate the mean deviation before attempting to find the oscillator’s value: a task that is often considered as rather time consuming as it consists of several complex steps.

In order to find the mean deviation needed for determining the Commodity Channel Index Indicator value, it would first be crucial to identify the average price for a given set of periods and afterwards subtract it to the average price of every period included in the set. Upon completing such a step, it would then be essential to compute for the absolute value of the resulting numbers and subsequently find the total of the resulting values. Once done, it would be a must to glance upon the number of periods utilized for such computations and then use it to divide the total absolute value.
 

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After following the instructions delineated above, one would now have the mean deviation. In this sense, it would finally be appropriate to compute for the Commodity Channel Index Indicator. In order to do so, it would first be necessary to identify the average price by finding the sum of the high, the low, and the close, and afterwards dividing the resulting value by three. The next step would be to subtract the average price for the specific set of periods with the resulting number. The final part of the entire computation process requires one to divide the value obtained from the previous step by the product of the mean deviation and 0.015.

Upon obtaining several Commodity Channel Index values, a graph should be made. By comparing the graph with actual trends, one would be able to identify points that signal an upcoming upswing: specifically, by taking note of portions of the Commodity Channel Index graph that exceed the 100 mark. As also mentioned beforehand, such an oscillator may also be used as a downswing-warning tool: areas of the graph below the -100 mark are indicative of potential declines. All in all, while computing for the Commodity Channel Index Indicator is challenging, the knowledge that one gains from such a pursuit is definitely rewarding.

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