Trading channels by John F. Ehlers
You don't have to examine price charts very long before you can picture the prices varying around a
trendline in a trading channel, having the trendline reverse, and the trading within the channel begin all
over again. We will describe two methods that can help visualize the channels and identify the price turns
that comprise the channel edges. The first of these is the Commodity Channel Index (CCI) that measures
the price excursions from the mean as a statistical variation. The second method brackets the price
trading channel that is centered on a best-fitting straight trendline. Both approaches are included in the
BASIC program listing so that their effects can be compared (Figure 6). The program is usable for your
daily trading with a simple conversion of daily prices into the program variable format.
Commodity Channel Index (CCI)
The CCI was first described by Donald Lambert (Commodities, October 1980, pp. 39-40). He described
the index to be like a "standard score" in statistics. The basic approach is first to calculate the average
price value using a moving average. This establishes the center of a kind of trendline. Then, the mean
deviation from the trendline is calculated. The final step computes the daily difference from the moving
average as a ratio to the mean deviation. The ratio is divided by the constant .015 so that 70 to 80 percent
of the variation falls within a +/– 100 percent channel index.