Constructing the Commodity Channel Index from typical price and mean deviation

Finish the scale before the rule

The Commodity Channel Index is built from a typical price equal to the high, low, and close divided by three, then an n-period simple average of those typical prices. Mean deviation of the same typical-price window is the scaling base.

Editorial reading: lock that typical-price average, the mean-deviation scale, and the channel mapping before any crossing rule is attached. The series has to exist as a scaled deviation from its average before it can be treated as a timer, a hook, or a fade.

Typical price, mean deviation, and the scaling constant

Typical price is the bar average formed from high, low, and close. The lookback then takes a simple average of those typical prices.

Mean deviation is the average absolute gap between each typical price in the lookback and their simple mean. The index equals current typical price minus that average, divided by 0.015 times the mean deviation.

The 0.015 factor is the scaling constant. It is applied so that about 70 to 80 percent of readings stay between the +100 and -100 channel rails.

Cycle lookback when the series is a timer

When the series is used as a cycle timer, the cycle lookback is kept shorter than one third of the cycle length.

How the same channel rails get wired

One documented rule treats a break above +100 as a long signal and a later downward crossing as the exit, with the mirror sequence at -100 for shorts.

A later rule variation generates a long only after the index has gone below -100 and then turns up, and a short after it has gone above +100 and then turns down. Editorial note: that later sequence is a reversal hook, a turn back toward the channel after the index has already left it.

The same series can be read as a divergence detector when price makes a new extreme and the index does not, or as an overbought or oversold oscillator outside the plus-or-minus 100 band.

Reuse after cycle timing receded

After the original cycle-timing setting receded, the same construction was reused as a trend and momentum gauge of deviation from a moving average, analogous to a price channel. Editorial reading: the typical-price average and mean-deviation scale stay in place while the job assigned to the channel rails changes.