Commodity channel index construction from typical price to a smoothed zero line

Typical price and the scaled deviation

The commodity channel index is built as a ratio of how far the current typical price sits from the mean typical price of a chosen lookback. Mean deviation is multiplied by 0.015 so the series plots around a zero line.

Typical price uses the average of a bar high, low, and close rather than the close alone. That average is the input compared with the lookback mean of typical price.

Zero line and one-hundred-percent bands

A zero-line cross of the commodity channel index is treated as the counterpart of price crossing an arithmetic moving average. The plus and minus 100 percent lines mark one mean deviation from that moving-average reference.

Most software defaults the lookback to 20 periods. Readings can extend beyond plus or minus 300 percent.

An original band rule

One original threshold rule treats a move through plus 100 percent as a long-side trend condition and a move through minus 100 percent as a short-side trend condition. The same rule notes that 70 to 80 percent of price action stays between those bands.

A moving-average overlay on the same series

One illustrated construction applies a five-period exponential moving average to 20-period commodity channel index values and uses that smoothed series crossing zero as the alert. That pairing is a dual commodity channel index: the daily series plotted with a five-period exponential moving average of those same values.

Alerts were also described when the daily series and its moving average cross each other or diverge from price. Divergence is disagreement between the dual commodity channel index path and the underlying price path, used as an alert or confirmation condition.

Weekly lookbacks and a moving-average comparison

Independent weekly tests compared a 90-week commodity channel index rule with a 40-week moving-average crossover. Those tests alternatively proposed initiating at the zero-line cross with a 53-week lookback.

A daily OEX path

On a daily OEX chart, the five-period exponential moving average of a 20-period commodity channel index stayed above zero through an uptrend from late November 1994 until it crossed below zero on 2 August 1995. It then stayed below zero through an August range until a later upside cross coincided with a new advance.

Lookback length and incomplete first bars

Lengthening or shortening the lookback can confirm trend or divergence. The lookback is the number of bars used to compute the mean typical price and mean deviation, so changing it alters trend confirmation versus false-signal frequency.

Intraday use was illustrated with 60-minute studies and by joining the prior session last hour to the current session so the first bar is not computed from incomplete data.