V.10:2 (67-74): The Commodity Channel Index by Barbara Star, Ph.D.

V.10:2 (67-74): The Commodity Channel Index by Barbara Star, Ph.D.
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The Commodity Channel Index by Barbara Star, PhD.

A technical analytical standard that's often misunderstood, the Commodity Channel Index, which was developed by technician/programmer Donald Lambert more than a decade ago, offers a broad range of trading options to use alone or with other indicators.

Lambert, during the course of his research, noticed that many commodities displayed cyclic patterns that reminded him of sine waves and formulated the theory based on that observation. The index, which author Barbara Star explains does not calculate cycle lengths, instead helps to determine when a cycle trend is in force; she goes on to explain how the Commodity Channel Index can be and has been used, along with enlightening commentary from inventor Donald Lambert himself.

The Commodity Channel Index (CCI), which was developed by Donald Lambert in 1980, started out as a programming experiment. At that time, personal computers were not yet widely used by individual traders; most calculations were done by hand. Lambert's work involved programming the TI-59, a hand-held calculator. "I wanted to develop something that could be used by traders," he told me, "but also something that showed the value of using hand-held calculators, which were becoming more affordable. So I developed the CCI mostly as a programming exercise because its calculations would be too difficult, time-consuming and prone to error if done by hand." Later, with the introduction of technical analysis software,-the CCI became a standard inclusion, albeit somewhat misunderstood, among the indicators provided in computer trading packages.

In conducting his research, Lambert had noticed that many commodities displayed cyclic price patterns reminiscent of a sine wave. "I came up with the idea that as you approached a top, the price level should look more or less like a sine wave approaching its peak," he explained. "I related the CCI to that." According to his theory, a perfectly cyclic commodity would exhibit a relationship between price variability and where it is on the curve.

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