Constructing a commodity channel index and a regression price channel

Two constructions on one bar series

The archive workflow builds a statistical index and a geometric price channel on the same bars. They share the series, but they are not interchangeable pictures of the same calculation.

The index is a scaled ratio of the current typical-price gap from its moving average to the mean deviation of that gap. The price channel is a pair of parallel boundaries drawn around a fitted straight trendline so that recent price is expected to oscillate between those edges.

Typical price and the commodity channel index

Typical price is a single bar value formed by averaging the high, low, and close before any channel or index calculation.

The statistical index is constructed from typical price by taking a moving average, measuring mean absolute deviation from that average, and dividing the current gap by that deviation times 0.015 so that most readings fall inside a plus-or-minus 100 band.

The moving-average window for that index may be set to an estimated dominant cycle. The original suggested range is 5 to 25 observations, and the supplied construction accepts an integer cycle length from 5 through 60.

A residual envelope around a fitted line

A geometric channel is centered on a best-fit straight trendline whose length is found by starting a short trial fit and lengthening it in five-observation steps until the correlation with price stops increasing at the same sign. That lookback is the correlation-selected length.

After the highest-correlation length is locked, channel edges are placed at the average of the largest positive and negative residuals from that fitted line. That half-width is the residual envelope.

Channel length may be taken from that automatic search or entered manually as an integer between 10 and 60 observations.

How an edge is read

The overlay's working hypothesis is that price near a channel edge tends to turn back inside the band. A failure to turn is treated as a breakout that invalidates the current envelope.

A second construction rule, the trend-aligned filter, excludes entries that go against the slope of the major fitted trendline, even when price is at a channel edge or the statistical index is extended.

When the two pictures agree

On a series with a single well-defined cycle, the index and the regression envelope tend to describe the same swings. When several cycles of similar strength are present, the same construction can issue conflicting or premature edge readings.

Worked charts show that automatic length search with a 12-observation cycle can produce a visually short envelope, while a manually set 30-observation length on the same cycle setting traces a clearer trend-centered band.