This section introduces the two types of technical trading indicators investigated in this paper: Commodity Channel Indexes (CCI) and Williams Overbought/ Oversold Index (WMS). These two types are examined using a variety of different parameter values. The amount of rules utilized to CCI is 1050, while the amount of rules applied to WMS is 450. In the following subsections, I describe each of these two technical indicators and demonstrate how to calculate their returns.
4.1.1 Commodity Channel Index (CCI)
The Commodity Channel Index (CCI) was created by Donald Lambert in 1980 and its trading application is to recognize new trends and to warn about extreme conditions when trend reversal could be expected. CCI defines the position of the current price in relation to the price moving average. Positive CCI readings indicate price moving above price average and negative CCI readings denote price movement below price average. The assumption behind the indicator is that the prices of commodities move in cycles of highs and lows at periodic intervals.
The CCI calculation can be performed in the following four steps:
Step 1. Calculate the last period's Typical Price (TP) TPt = within n days. Typical price (TP) means the average price of those three price.
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Step 2. Calculate the Simple Moving Average of Typical Price (SMATP).
SMATP =
Calculate the sum of TP and divide the summation by the number of periods.
Step 3. Calculate the Mean Deviation (MD).
MD t =
absolute values together and divide by n to calculate the mean deviation.
Step 4. The last step is to calculate the CCI by the following formula:
CCI t =
The volatility of CCI depends on the period selected. A shorter CCI (CCI with a shorter bar period setting) will be more volatile and will generate more trading signals. Conversely, the more periods that are used to calculate the CCI - the fewer signals would be generated. Thus, the primary parameter of CCI is the period of time n.
According to Lambert's technical analysis theory, CCI values below -100 indicate an oversold index and can be used as a "Buy" signal. Conversely, CCI values above +100 denote an overbought index and can be used as a "Sell"
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國立 政 治 大 學
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signal. CCI is defined as follows: a buy (sell) signal is extracted when the index exceeds (penetrates downward) a from the lower (higher) index. Once a buy (sell) signal has been observed, traders buy (sell) and hold (go short) until the next sell (buy) signal has been extracted. Hence, there are two other different parameters: a is the trading signals, while b is the lag days of trading after trading signals appear. Therefore, the number of trading rules created by CCI is 1050. Table 1 is the summary of total parameters of CCI adopted in this paper.
Table 1 Summary of total parameters of CCI
Three parameters of CCI: “n” is the period of time that the technical trading rules utilizes to calculate CCI, while “a” represents the upper bar and bottom bar for deciding the appearance of trading signals, “b” is the lag days of trading after the trading signals appear.
Trading
Rules Parameters Value Number of
Kinds CCI Period of Time (n) 7, 14, 21, 28, 35, 42, 49, 56, 63, 70 10
Trading signals (a) ±50, ±55, ±60, ±65, ±70, ±75, ±80, …,
±120, ±125, ±130, ±135, ±140, ±145,±150 21
Days of lag (b) 0, 1 , 2, 3, 4 5
1,050
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4.1.2 Williams Overbought/ Oversold Index (WMS)
The Williams Overbought/Oversold (WMS) Index is very similar to the Stochastic and the William’s %R studies, except that the Stochastic has internal smoothing; whereas, the WMS is plotted on an upside-down scale, with 0 at the top and -100 at the bottom. The WMS relates the difference between today’s closing price and the period’s lowest price with the trade margin of the given period, demonstrating the relative position of the closing price within the given period.
The WMS index calculation can be performed as follows:
WMS ＝
The WMS index locates between 0 and -100; a value of 0 shows that the closing price is the same as the period high. Conversely, a value of -100 shows that the closing price is identical to the period low. This trading system script uses WMS indicator to generate trading signals whenever the underlying symbol is overbought or oversold. The higher the index is, the more the volume of overbought the market has; while the lower the WMS index is, the more the volume of oversold the market has.
The WMS is designed to show the difference between the period high and the present day’s closing price with the trading range of the specified period.
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observation period and helps define the trading strategies as follows.
The trading rules of WMS index are as follows:
1. “Sell” when WMS index shows the symbol is overbought, which means the index declines under the upper bar.
2. “Buy” when WMS index shows the symbol is oversold, which means the index increases over the bottom bar.
The volatility of WMS depends on the period selected. A shorter WMS will be more volatile and will generate more trading signals. Conversely, the more periods that are used to calculate the WMS index, the fewer signals will be generated. Thus, the primary parameter of WMS is the period of time n. The longer the period of time is, the less WMS index produces at a limited period of time. Furthermore, the trading signals produced by the value of upper and bottom bar, a, which effects the accuracy of trading decision making, while b means the lag days of trading after the trading signals appear. Thus, the amount of all trading rules on WMS is 450. Table 2 is the summary of total parameters on WMS index.
Table 2 Summary of total parameters on WMS
Three parameters of WMS: “n” is the period of time that the technical trading strategy utilizes to calculate WMS, while “a” represents the upper bar and bottom bar for deciding the appearance of trading signals and “b” is the lag days after the trading signals appear.
Trading
Rules Parameters Value Number of
Kinds
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