Standard deviation 150

[2]
A useful property of standard deviation is that, unlike variance, it is
expressed in the same units as the data. Note, however, that for
measurements with percentage as unit, the standard deviation will have
percentage points as unit.
In addition to expressing the variability of a population, standard
deviation is commonly used to measure confidence in statistical
conclusions. For example, the margin of error in polling data is
determined by calculating the expected standard deviation in the results Cumulative probability of a normal distribution
if the same poll were to be conducted multiple times. The reported with expected value 0 and standard deviation 1
margin of error is typically about twice the standard deviation – the
radius of a 95 percent confidence interval. In science, researchers
commonly report the standard deviation of experimental data, and only
effects that fall far outside the range of standard deviation are
considered statistically significant – normal random error or variation
in the measurements is in this way distinguished from causal variation.
Standard deviation is also important in finance, where the standard
deviation on the rate of return on an investment is a measure of the
volatility of the investment.

When only a sample of data from a population is available, the

population standard deviation can be estimated by a modified quantity
called the sample standard deviation, explained below.
A data set with a mean of 50 (shown in blue) and
a standard deviation (σ) of 20.
Basic examples
Consider a population consisting of the following eight values:

Example of two sample populations with the

same mean and different standard deviations. Red
population has mean 100 and SD 10; blue
population has mean 100 and SD 50.

These eight data points have the mean (average) of 5:

To calculate the population standard deviation, first compute the difference of each data point from the mean, and
square the result of each:
Standard deviation 151

Next compute the average of these values, and take the square root:

This quantity is the population standard deviation; it is equal to the square root of the variance. The formula is
valid only if the eight values we began with form the complete population. If they instead were a random sample,
drawn from some larger, “parent” population, then we should have used 7 (n − 1) instead of 8 (n) in the denominator
of the last formula, and then the quantity thus obtained would have been called the sample standard deviation. See
the section Estimation below for more details.
A slightly more complicated real life example, the average height for adult men in the United States is about 70",
with a standard deviation of around 3". This means that most men (about 68%, assuming a normal distribution) have
a height within 3" of the mean (67"–73") — one standard deviation — and almost all men (about 95%) have a height
within 6" of the mean (64"–76") — two standard deviations. If the standard deviation were zero, then all men would
be exactly 70" high. If the standard deviation were 20", then men would have much more variable heights, with a
typical range of about 50"–90". Three standard deviations account for 99.7% of the sample population being studied,
assuming the distribution is normal (bell-shaped).

Definition of population values

Let X be a random variable with mean value μ:

Here the operator E denotes the average or expected value of X. Then the standard deviation of X is the quantity

That is, the standard deviation σ (sigma) is the square root of the average value of (X − μ)2.
The standard deviation of a (univariate) probability distribution is the same as that of a random variable having that
distribution. Not all random variables have a standard deviation, since these expected values need not exist. For
example, the standard deviation of a random variable that follows a Cauchy distribution is undefined because its
expected value μ is undefined.

Discrete random variable

In the case where X takes random values from a finite data set x1, x2, …, xN, with each value having the same
probability, the standard deviation is

or, using summation notation,

If, instead of having equal probabilities, the values have different probabilities, let x1 have probability p1, x2 have
probability p2, ..., xN have probability pN. In this case, the standard deviation will be
Standard deviation 152

Continuous random variable

The standard deviation of a continuous real-valued random variable X with probability density function p(x) is

where

and where the integrals are definite integrals taken for x ranging over the set of possible values of the random
variable X.
In the case of a parametric family of distributions, the standard deviation can be expressed in terms of the
parameters. For example, in the case of the log-normal distribution with parameters μ and σ2, the standard deviation
is [(exp(σ2) − 1)exp(2μ + σ2)]1/2.

Estimation
One can find the standard deviation of an entire population in cases (such as standardized testing) where every
member of a population is sampled. In cases where that cannot be done, the standard deviation σ is estimated by
examining a random sample taken from the population. Some estimators are given below:

With standard deviation of the sample

An estimator for σ sometimes used is the standard deviation of the sample, denoted by sN and defined as follows:

This estimator has a uniformly smaller mean squared error than the sample standard deviation (see below), and is the
maximum-likelihood estimate when the population is normally distributed. But this estimator, when applied to a
small or moderately sized sample, tends to be too low: it is a biased estimator.
The standard deviation of the sample is the same as the population standard deviation of a discrete random variable
that can assume precisely the values from the data set, where the probability for each value is proportional to its
multiplicity in the data set.

With sample standard deviation

The most common estimator for σ used is an adjusted version, the sample standard deviation, denoted by s and
defined as follows:

where are the observed values of the sample items and is the mean value of these observations.
This correction (the use of N − 1 instead of N) is known as Bessel's correction. The reason for this correction is that
s2 is an unbiased estimator for the variance σ2 of the underlying population, if that variance exists and the sample
values are drawn independently with replacement. However, s is not an unbiased estimator for the standard deviation
σ; it tends to underestimate the population standard deviation.
Standard deviation 153

The term standard deviation of the sample is used for the uncorrected estimator (using N) while the term sample
standard deviation is used for the corrected estimator (using N − 1). The denominator N − 1 is the number of degrees
of freedom in the vector of residuals, .

Other estimators
Although an unbiased estimator for σ is known when the random variable is normally distributed, the formula is
complicated and amounts to a minor correction. Moreover, unbiasedness (in this sense of the word) is not always
desirable.

Identities and mathematical properties

The standard deviation is invariant under changes in location, and scales directly with the scale of the random
variable. Thus, for a constant c and random variables X and Y:

The standard deviation of the sum of two random variables can be related to their individual standard deviations and
the covariance between them:

where and stand for variance and covariance, respectively.

The calculation of the sum of squared deviations can be related to moments calculated directly from the data. The
standard deviation of the sample can be computed as:

The sample standard deviation can be computed as:

For a finite population with equal probabilities at all points, we have

Thus, the standard deviation is equal to the square root of (the average of the squares less the square of the average).
See computational formula for the variance for a proof of this fact, and for an analogous result for the sample
standard deviation.

Interpretation and application

A large standard deviation indicates that the data points are far from the mean and a small standard deviation
indicates that they are clustered closely around the mean.
For example, each of the three populations {0, 0, 14, 14}, {0, 6, 8, 14} and {6, 6, 8, 8} has a mean of 7. Their
standard deviations are 7, 5, and 1, respectively. The third population has a much smaller standard deviation than the
other two because its values are all close to 7. In a loose sense, the standard deviation tells us how far from the mean
the data points tend to be. It will have the same units as the data points themselves. If, for instance, the data set {0, 6,
8, 14} represents the ages of a population of four siblings in years, the standard deviation is 5 years.
As another example, the population {1000, 1006, 1008, 1014} may represent the distances traveled by four athletes,
measured in meters. It has a mean of 1007 meters, and a standard deviation of 5 meters.
Standard deviation 154

Standard deviation may serve as a measure of uncertainty. In physical science, for example, the reported standard
deviation of a group of repeated measurements should give the precision of those measurements. When deciding
whether measurements agree with a theoretical prediction, the standard deviation of those measurements is of crucial
importance: if the mean of the measurements is too far away from the prediction (with the distance measured in
standard deviations), then the theory being tested probably needs to be revised. This makes sense since they fall
outside the range of values that could reasonably be expected to occur if the prediction were correct and the standard
deviation appropriately quantified. See prediction interval.

Application examples
The practical value of understanding the standard deviation of a set of values is in appreciating how much variation
there is from the "average" (mean).

Climate
As a simple example, consider the average daily maximum temperatures for two cities, one inland and one on the
coast. It is helpful to understand that the range of daily maximum temperatures for cities near the coast is smaller
than for cities inland. Thus, while these two cities may each have the same average maximum temperature, the
standard deviation of the daily maximum temperature for the coastal city will be less than that of the inland city as,
on any particular day, the actual maximum temperature is more likely to be farther from the average maximum
temperature for the inland city than for the coastal one.

Sports
Another way of seeing it is to consider sports teams. In any set of categories, there will be teams that rate highly at
some things and poorly at others. Chances are, the teams that lead in the standings will not show such disparity but
will perform well in most categories. The lower the standard deviation of their ratings in each category, the more
balanced and consistent they will tend to be. Whereas, teams with a higher standard deviation will be more
unpredictable. For example, a team that is consistently bad in most categories will have a low standard deviation. A
team that is consistently good in most categories will also have a low standard deviation. However, a team with a
high standard deviation might be the type of team that scores a lot (strong offense) but also concedes a lot (weak
defense), or, vice versa, that might have a poor offense but compensates by being difficult to score on.
Trying to predict which teams, on any given day, will win, may include looking at the standard deviations of the
various team "stats" ratings, in which anomalies can match strengths vs. weaknesses to attempt to understand what
factors may prevail as stronger indicators of eventual scoring outcomes.
In racing, a driver is timed on successive laps. A driver with a low standard deviation of lap times is more consistent
than a driver with a higher standard deviation. This information can be used to help understand where opportunities
might be found to reduce lap times.

Finance
In finance, standard deviation is a representation of the risk associated with a given security (stocks, bonds, property,
etc.), or the risk of a portfolio of securities (actively managed mutual funds, index mutual funds, or ETFs). Risk is an
important factor in determining how to efficiently manage a portfolio of investments because it determines the
variation in returns on the asset and/or portfolio and gives investors a mathematical basis for investment decisions
(known as mean-variance optimization). The overall concept of risk is that as it increases, the expected return on the
asset will increase as a result of the risk premium earned – in other words, investors should expect a higher return on
an investment when said investment carries a higher level of risk, or uncertainty of that return. When evaluating
investments, investors should estimate both the expected return and the uncertainty of future returns. Standard
deviation provides a quantified estimate of the uncertainty of future returns.
Standard deviation 155

For example, let's assume an investor had to choose between two stocks. Stock A over the past 20 years had an
average return of 10 percent, with a standard deviation of 20 percentage points (pp) and Stock B, over the same
period, had average returns of 12 percent but a higher standard deviation of 30 pp. On the basis of risk and return, an
investor may decide that Stock A is the safer choice, because Stock B's additional two percentage points of return is
not worth the additional 10 pp standard deviation (greater risk or uncertainty of the expected return). Stock B is
likely to fall short of the initial investment (but also to exceed the initial investment) more often than Stock A under
the same circumstances, and is estimated to return only two percent more on average. In this example, Stock A is
expected to earn about 10 percent, plus or minus 20 pp (a range of 30 percent to -10 percent), about two-thirds of the
future year returns. When considering more extreme possible returns or outcomes in future, an investor should
expect results of as much as 10 percent plus or minus 60 pp, or a range from 70 percent to −50 percent, which
includes outcomes for three standard deviations from the average return (about 99.7 percent of probable returns).
Calculating the average return (or arithmetic mean) of the return of a security over a given period will generate the
expected return of the asset. For each period, subtracting the expected return from the actual return results in the
difference from the mean. Squaring the difference in each period and taking the average gives the overall variance of
the return of the asset. The larger the variance, the greater risk the security carries. Finding the square root of this
variance will give the standard deviation of the investment tool in question.
Population standard deviation is used to set the width of Bollinger Bands, a widely adopted technical analysis tool.
For example, the upper Bollinger Band is given as x + nσx. The most commonly used value for n is 2; there is about
a five percent chance of going outside, assuming a normal distribution of returns.

Geometric interpretation
To gain some geometric insights, we will start with a population of three values, x1, x2, x3. This defines a point P =
(x1, x2, x3) in R3. Consider the line L = {(r, r, r) : r ∈ R}. This is the "main diagonal" going through the origin. If our
three given values were all equal, then the standard deviation would be zero and P would lie on L. So it is not
unreasonable to assume that the standard deviation is related to the distance of P to L. And that is indeed the case. To
move orthogonally from L to the point P, one begins at the point:

whose coordinates are the mean of the values we started out with. A little algebra shows that the distance between P
and M (which is the same as the orthogonal distance between P and the line L) is equal to the standard deviation of
the vector x1, x2, x3, multiplied by the square root of the number of dimensions of the vector (3 in this case.)

Chebyshev's inequality
An observation is rarely more than a few standard deviations away from the mean. Chebyshev's inequality ensures
that, for all distributions for which the standard deviation is defined, the amount of data within a number of standard
deviations of the mean is at least as much as given in the following table.
Standard deviation 156

Minimum population Distance from mean

50% √2

75% 2

89% 3

94% 4

96% 5

97% 6

[3]

Rules for normally distributed data

The central limit theorem says that the
distribution of an average of many
independent, identically distributed
random variables tends toward the
famous bell-shaped normal distribution
with a probability density function of:

Dark blue is less than one standard deviation from the mean. For the normal distribution,
this accounts for 68.27 percent of the set; while two standard deviations from the mean
(medium and dark blue) account for 95.45 percent; three standard deviations (light,
medium, and dark blue) account for 99.73 percent; and four standard deviations account
for 99.994 percent. The two points of the curve that are one standard deviation from the
mean are also the inflection points.

where μ is the expected value of the random variable, σ equals its standard deviation divided by n1/2, and n is the
number of random variables. The standard deviation therefore is simply a scaling variable that adjusts how broad the
curve will be, though it also appears in the normalizing constant.
If a data distribution is approximately normal then the proportion of data values within z standard deviations of the
mean is defined by:

Proportion =

where is the error function. If a data distribution is approximately normal then about 68 percent of the data values
are within one standard deviation of the mean (mathematically, μ ± σ, where μ is the arithmetic mean), about 95
percent are within two standard deviations (μ ± 2σ), and about 99.7 percent lie within three standard deviations
(μ ± 3σ). This is known as the 68-95-99.7 rule, or the empirical rule.
For various values of z, the percentage of values expected to lie in and outside the symmetric interval, CI = (−zσ, zσ),
are as follows:
Standard deviation 157

zσ Percentage within CI Percentage outside CI Fraction outside CI

0.674σ 50% 50% 1/2
1σ 68.2689492% 31.7310508% 1 / 3.1514872
1.645σ 90% 10% 1 / 10
1.960σ 95% 5% 1 / 20
2σ 95.4499736% 4.5500264% 1 / 21.977895
2.576σ 99% 1% 1 / 100
3σ 99.7300204% 0.2699796% 1 / 370.398
3.2906σ 99.9% 0.1% 1 / 1000
4σ 99.993666% 0.006334% 1 / 15,787
5σ 99.9999426697% 0.0000573303% 1 / 1744278
6σ 99.9999998027% 0.0000001973% 1 / 506,800,000
7σ 99.9999999997440% 0.0000000002560% 1 / 390700000000

Relationship between standard deviation and mean

The mean and the standard deviation of a set of data are usually reported together. In a certain sense, the standard
deviation is a "natural" measure of statistical dispersion if the center of the data is measured about the mean. This is
because the standard deviation from the mean is smaller than from any other point. The precise statement is the
following: suppose x1, ..., xn are real numbers and define the function:

Using calculus or by completing the square, it is possible to show that σ(r) has a unique minimum at the mean:

Variability can also be measured by the coefficient of variation, which is the ratio of the standard deviation to the
mean. It is a dimensionless number.
Often we want some information about the precision of the mean we obtained. We can obtain this by determining the
standard deviation of the sampled mean. The standard deviation of the mean is related to the standard deviation of
the distribution by:

where N is the number of observation in the sample used to estimate the mean. This can easily be proven with:

hence
Standard deviation 158

Resulting in:

Rapid calculation methods

The following two formulas can represent a running (continuous) standard deviation. A set of three power sums s0,
s1, s2 are each computed over a set of N values of x, denoted as x1, ..., xN:

Note that s0 raises x to the zero power, and since x0 is always 1, s0 evaluates to N.
Given the results of these three running summations, the values s0, s1, s2 can be used at any time to compute the
current value of the running standard deviation:

Similarly for sample standard deviation,

In a computer implementation, as the three sj sums become large, we need to consider round-off error, arithmetic
overflow, and arithmetic underflow. The method below calculates the running sums method with reduced rounding
errors:

where A is the mean value.

Sample variance:

Standard variance:

Weighted calculation
When the values xi are weighted with unequal weights wi, the power sums s0, s1, s2 are each computed as:

And the standard deviation equations remain unchanged. Note that s0 is now the sum of the weights and not the
number of samples N.
The incremental method with reduced rounding errors can also be applied, with some additional complexity.
A running sum of weights must be computed:
Standard deviation 159

and places where 1/i is used above must be replaced by wi/Wi:

In the final division,

and

where n is the total number of elements, and n' is the number of elements with non-zero weights. The above formulas
become equal to the simpler formulas given above if weights are taken as equal to one.

Combining standard deviations

Population-based statistics
The populations of sets, which may overlap, can be calculated simply as follows:

Standard deviations of non-overlapping (X ∩ Y = ∅) sub-populations can be aggregated as follows if the size (actual
or relative to one another) and means of each are known:

For example, suppose it is known that the average American man has a mean height of 70 inches with a standard
deviation of three inches and that the average American woman has a mean height of 65 inches with a standard
deviation of two inches. Also assume that the number of men, N, is equal to the number of woman. Then the mean
and standard deviation of heights of American adults could be calculated as:

For the more general case of M non-overlapping populations, X1 through XM, and the aggregate population
:
Standard deviation 160

where

If the size (actual or relative to one another), mean, and standard deviation of two overlapping populations are
known for the populations as well as their intersection, then the standard deviation of the overall population can still
be calculated as follows:

If two or more sets of data are being added together datapoint by datapoint, the standard deviation of the result can
be calculated if the standard deviation of each data set and the covariance between each pair of data sets is known:

For the special case where no correlation exists between any pair of data sets, then the relation reduces to the
root-mean-square:

Sample-based statistics
Standard deviations of non-overlapping (X ∩ Y = ∅) sub-samples can be aggregated as follows if the actual size and
means of each are known:

For the more general case of M non-overlapping data sets, X1 through XM, and the aggregate data set :

where:

If the size, mean, and standard deviation of two overlapping samples are known for the samples as well as their
intersection, then the standard deviation of the aggregated sample can still be calculated. In general:
Standard deviation 161

History
The term standard deviation was first used[4] in writing by Karl Pearson[5] in 1894, following his use of it in lectures.
This was as a replacement for earlier alternative names for the same idea: for example, Gauss used mean error.[6]

References
[1] Gauss, Carl Friedrich (1816). "Bestimmung der Genauigkeit der Beobachtungen". Zeitschrift für Astronomie und verwandt Wissenschaften 1:
187–197.
[2] Walker, Helen (1931). Studies in the History of the Statistical Method. Baltimore, MD: Williams & Wilkins Co. pp. 24–25.
[3] Ghahramani, Saeed (2000). Fundamentals of Probability (2nd Edition). Prentice Hall: New Jersey. p. 438.
[4] Dodge, Yadolah (2003). The Oxford Dictionary of Statistical Terms. Oxford University Press. ISBN 0-19-920613-9.
[5] Pearson, Karl (1894). "On the dissection of asymmetrical frequency curves". Phil. Trans. Roy. Soc. London, Series A 185: 719–810.
[6] Miller, Jeff. "Earliest Known Uses of Some of the Words of Mathematics" (http:/ / jeff560. tripod. com/ mathword. html). .

External links
• Online Standard Deviation Calculator (http://www.miniwebtool.com/standard-deviation-calculator/)
• A Guide to Understanding & Calculating Standard Deviation (http://stats4students.com/measures-of-spread-3.
php)
• C++ Source Code (http://www.chrisevansdev.com/rapidlive-statistics/) (license free) C++ implementation of
rapid mean, variance and standard deviation calculation
• Interactive Demonstration and Standard Deviation Calculator (http://www.usablestats.com/tutorials/
StandardDeviation)
• Standard Deviation – an explanation without maths (http://www.techbookreport.com/tutorials/stddev-30-secs.
html)
• Standard Deviation, an elementary introduction (http://davidmlane.com/hyperstat/A16252.html)
• Standard Deviation, a simpler explanation for writers and journalists (http://www.robertniles.com/stats/stdev.
shtml)
• Standard Deviation Calculator (http://invsee.asu.edu/srinivas/stdev.html)
• Texas A&M Standard Deviation and Confidence Interval Calculators (http://www.stat.tamu.edu/~jhardin/
applets/)
• The concept of Standard Deviation is shown in this 8-foot-tall (2.4 m) Probability Machine (named Sir Francis)
comparing stock market returns to the randomness of the beans dropping through the quincunx pattern. (http://
www.youtube.com/watch?v=AUSKTk9ENzg) from Index Funds Advisors IFA.com (http://www.ifa.com)
 162

INDICATORS: Other

Advance decline line

The Advance/Decline line is a stock market technical indicator used by speculators to measure the number of
individual stocks participating in a market rise or fall. As price changes of large stocks can have a disproportionate
effect on capitalization weighted stock market indices such as the S&P 500, the NYSE Composite Index, and the
NASDAQ Composite index, it can be useful to know how broadly this movement extends into the larger universe of
smaller stocks. Since market indexes represent a group of stocks, they do not present the whole picture of the trading
day and the performance of the market during this day. Though the market indices give an idea about what has
happened during the trading day, advance/decline numbers give an idea about the individual performance of
particular stocks.
The Advance/Decline line is a plot of the cumulative sum of the daily difference between the number of issues
advancing and the number of issues declining in a particular stock market index. Thus it moves up when the index
contains more advancing than declining issues, and moves down when there are more declining than advancing
issues. The formula for ADL is[1] :
A/D Line = (# of Advancing Stocks - # of Declining Stocks) + Yesterday's A/D Line Value
The Advance/Decline Line (ADL) is the most popular of all internal indicators by far[1] .

Divergence
"Divergence" is when the stock market index moves in one direction while the ADL on that index moves in the
opposite direction[2] . If the index moves up while the ADL moves down, the index may be misleading about the true
direction of the overall market, as happened toward the end of the US Dot-com bubble in 1999-2000[3] , when the
indices continued to rally while the ADL diverged downward starting at the beginning of 1999. Such negative
divergence was also seen toward the end of the roaring twenties bull market, during 1972 at the height of the Nifty
Fifty market[4] , and starting in March 2008 before the late-2008 market collapse[5] .

Advance/Decline Numbers Application

There may be cases in which an index reports a gain at the end of the trading day. This gain may be caused by an
increase in a certain number of stocks. However, a significant lead by declining stocks may be observed relative to
the advancing stocks.[6]
However, these results should be interpreted as a decline in the market, no matter that the index has experienced an
increase. Therefore, you should base your judgments regarding the performance of the market on the
advance/decline numbers, not on the performance of a particular index no matter how broad it is.
There have been many cases in which a major increase in an index was not accompanied by an increase in the
advance number. In such a case it is reasonable to conclude that by the end of the trading day the index will decline.
The reverse is also true. For instance, if there is a significant movement in the advance/decline numbers, you can
expect a movement in the different indexes as well.
Additionally, a market that experiences a trend toward either a decline or an advance is highly unlikely to reverse its
movement immediately on the next trading day.
Advance decline line 163

Advance/decline numbers can be also used in your daily observations of the trades in order to determine whether a
particular trend is a false or a spot.
Finally, use advance/decline numbers whenever you need to make a judgment on the performance of the market.
These numbers can also give you understanding on the movements of the indexes.

Example of Market Breadth Chart

• NASDAQ Breadth [7]
• DAX Breadth [8]
• FTSE Breadth [9]
• STI Breadth [10]

References
[1] "Market Breadth: Advance/Decline Indicators" (http:/ / www. investopedia. com/ university/ marketbreadth/ marketbreadth3. asp).
Investopedia. 2010. . Retrieved 2010-09-12.
[2] http:/ / www. trade10. com/ advanceDecline. html
[3] http:/ / blogs. stockcharts. com/ chartwatchers/ 2006/ 09/ the-importance-of-the-ny-a-d-line. html
[4] http:/ / www. lewrockwell. com/ orig5/ duffy4. html
[5] http:/ / www. marketoracle. co. uk/ Article4754. html
[6] "Advance/Decline Ratio Basics" (http:/ / www. stock-market-investors. com/ stock-investing-basics/ advance-decline-ratio-basics. html).
Stock-Market-Investors.com. 2008. . Retrieved 2010-09-12.
[7] http:/ / www. livecharts. co. uk/ breadth_charts/ nasdaq_advance_decline. php
[8] http:/ / www. livecharts. co. uk/ breadth_charts/ dax_advance_decline. php
[9] http:/ / www. livecharts. co. uk/ breadth_charts/ ftse_100_advance_decline. php
[10] http:/ / stibreadth. blogspot. com/

Commodity Channel Index

The Commodity Channel Index (CCI) is an oscillator originally introduced by Donald Lambert in an article
published in the October 1980 issue of Commodities magazine (now known as Futures magazine).
Since its introduction, the indicator has grown in popularity and is now a very common tool for traders in identifying
cyclical trends not only in commodities, but also equities and currencies. The CCI can be adjusted to the timeframe
of the market traded on by changing the averaging period.

Calculation
The CCI is calculated as the difference between the typical price of a commodity and its simple moving average,
divided by the mean absolute deviation of the typical price. The index is usually scaled by an inverse factor of 0.015
to provide more readable numbers:

where the pt is the , SMA is the simple moving average, and σ is the mean

absolute deviation.
For scaling purposes, Lambert set the constant at 0.015 to ensure that approximately 70 to 80 percent of CCI values
would fall between -100 and +100. The CCI fluctuates above and below zero. The percentage of CCI values that fall
between +100 and -100 will depend on the number of periods used. A shorter CCI will be more volatile with a
smaller percentage of values between +100 and -100. Conversely, the more periods used to calculate the CCI, the
Commodity Channel Index 164

higher the percentage of values between +100 and -100.

Interpretation
Traders and investors use the
Commodity Channel Index to help
identify price reversals, price extremes
and trend strength. As with most
indicators, the CCI should be used in
conjunction with other aspects of
technical analysis. CCI fits into the
momentum category of oscillators. In
addition to momentum, volume
indicators and the price chart may also
influence a technical assessment. It is
often used for detecting divergences
from price trends as an
overbought/oversold indicator, and to
draw patterns on it and trade according to those patterns. In this respect, it is similar to bollinger bands, but is
presented as an indicator rather than as overbought/oversold levels.

The CCI typically oscillates above and below a zero line. Normal oscillations will occur within the range of +100
and -100. Readings above +100 imply an overbought condition, while readings below -100 imply an oversold
condition. As with other overbought/oversold indicators, this means that there is a large probability that the price will
correct to more representative levels.
The CCI has seen substantial growth in popularity amongst technical investors; today's traders often use the indicator
to determine cyclical trends in not only commodities, but also equities and currencies.[1]
The CCI, when used in conjunction with other oscillators, can be a valuable tool to identify potential peaks and
valleys in the asset's price, and thus provide investors with reasonable evidence to estimate changes in the direction
of price movement of the asset.[1]
Lambert's trading guidelines for the CCI focused on movements above +100 and below -100 to generate buy and sell
signals. Because about 70 to 80 percent of the CCI values are between +100 and -100, a buy or sell signal will be in
force only 20 to 30 percent of the time. When the CCI moves above +100, a security is considered to be entering into
a strong uptrend and a buy signal is given. The position should be closed when the CCI moves back below +100.
When the CCI moves below -100, the security is considered to be in a strong downtrend and a sell signal is given.
The position should be closed when the CCI moves back above -100.
Since Lambert's original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a
versatile indicator capable of producing a wide array of buy and sell signals.
• CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when the CCI
dips below -100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when
the CCI moves back above -100. From overbought levels, a sell signal might be given when the CCI moved back
below +100.
• As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive
divergence below -100 would increase the robustness of a signal based on a move back above -100. A negative
divergence above +100 would increase the robustness of a signal based on a move back below +100.
• Trend line breaks can be used to generate signals. Trend lines can be drawn connecting the peaks and troughs.
From oversold levels, an advance above -100 and trend line breakout could be considered bullish. From
Commodity Channel Index 165

overbought levels, a decline below +100 and a trend line break could be considered bearish.[2]

References
[1] Commodity Channel Index (CCI) (http:/ / www. investopedia. com/ terms/ c/ commoditychannelindex. asp) on Investopedia
[2] Commodity Channel Index (CCI) (http:/ / stockcharts. com/ school/ doku. php?id=chart_school:technical_indicators:commodity_channel_in)
on StockCharts.com - ChartSchool

External links
• Commodities & Charts Blog post on CCI (http://cmd-chart.blogspot.com/2007/04/cci-index.html)
• Commodities & Charts Blog images on CCI (http://cmd-chart.blogspot.com/2007/06/cci-commodities-index.
html)

Coppock curve
The Coppock curve or Coppock indicator is a technical analysis indicator for long-term stock market investors
created by E.S.C. Coppock, first published in Barron's Magazine on October 15, 1962.[1]
The indicator is designed for use on a monthly time scale. It's the sum of a 14-month rate of change and 11-month
rate of change, smoothed by a 10-period weighted moving average.
.
Coppock, the founder of Trendex Research in San Antonio, Texas,[2] was an economist. He had been asked by the
Episcopal Church to identify buying opportunities for long-term investors. He thought market downturns were like
bereavements and required a period of mourning. He asked the church bishops how long that normally took for
people, their answer was 11 to 14 months and so he used those periods in his calculation.[3]
A buy signal is generated when the indicator is below zero and turns upwards from a trough. No sell signals are
generated (that not being its design). The indicator is trend-following, and based on averages, so by its nature it
doesn't pick a market bottom, but rather shows when a rally has become established.
Coppock designed the indicator (originally called the "Trendex Model"[1] ) for the S&P 500 index, and it's been
applied to similar stock indexes like the Dow Jones Industrial Average. It's not regarded as well-suited to commodity
markets, since bottoms there are more rounded than the spike lows found in stocks.[4]

Variations
Although designed for monthly use, a daily calculation over the same period can be made, converting the periods to
294 day and 231 day rate of changes, and a 210 day weighted moving average.[5]
A slightly different version of the indicator is still used by the Investors Chronicle, a British investment magazine.
The main difference is that the Investors Chronicle version does include the sell signals, although it stresses that they
are to be treated with caution. This is because such signals could merely be a dip in a continuing bull market.[6]
Coppock curve 166

References
[1] Donald J. Durham Jr. (1964). "An Analysis of Stock Market Indicators" (http:/ / handle. dtic. mil/ 100. 2/ AD480859). Master's thesis, Naval
Postgraduate School. Monterey, California: Defense Technical Information Center. . "The Trendex model first came to the attention of the
author when it was described by E.S.C. Coppock in the 15 October 1962 issue of Barron's."
[2] 2001 Interview with John Bollinger (http:/ / www. theforexvillage. com/ Interviews-withTopTraders/ Interview-with-John-Bollinger. html)
from Active Trader magazine via theforexvillage.com
[3] Coppock Indicator (http:/ / www. finance-glossary. com/ terms/ Coppock-Indicator. htm?ginPtrCode=00000& id=2262& PopupMode=) at
the Global-Investor Glossary
[4] Coppock Curve Interpretation page (http:/ / www. topline-charts. com/ Encyclopedia/ coppock_curve_interpretation. htm) at Topline
Investment Graphics
[5] Coppock Indicator page (http:/ / www. incrediblecharts. com/ technical/ coppock_indicator. htm) at Incredible Charts
[6] IC/Coppock: Sell, sell, sell (http:/ / www. investorschronicle. co. uk/ InvestmentGuides/ Shares/ article/ 20070906/
ce752b0c-727f-11dc-baee-00144f2af8e8/ ICCoppock-Sell-sell-sell. jsp) from Investors Chronicle

External links
• MQL5 implementation of Coppock curve (http://www.earnforex.com/mt5-forex-indicators/Coppock.mq5)
• VT Trader implemenation of Coppock curve (http://www.vtsystems.com/resources/helps/0000/
HTML_VTtrader_Help_Manual_1-9/index.html?ti_coppockcurve.html)

Keltner channel
Keltner channel is a technical analysis indicator showing a central
moving average line plus channel lines at a distance above and below.
The indicator is named after Chester W. Keltner (1909-1998) who
described it in his 1960 book How To Make Money in Commodities.
But this name was applied only by those who heard about it from him,
Keltner called it the Ten-Day Moving Average Trading Rule and
indeed made no claim to any originality for the idea.

In Keltner's description the centre line is an 10-day simple moving Keltner channel example

average of typical price, where typical price each day is the average of
high, low and close,

The lines above and below are drawn a distance from that centre line, a distance which is the simple moving average
of the past 10 days' trading ranges (ie. range high to low on each day).
The trading strategy is to regard a close above the upper line as a strong bullish signal, or a close below the lower
line as strong bearish sentiment, and buy or sell with the trend accordingly, but perhaps with other indicators to
confirm.
The origin of this idea is uncertain. Keltner was a Chicago grain trader and perhaps it was common knowledge
among traders of the day. Or in the 1930s as a young man Keltner worked for Ralph Ainsworth (1884-1965)
backtested trading systems submitted when Ainsworth offered a substantial prize for a winning strategy, so it could
have been among those. But ideas of channels with fixed-widths go back to the earliest days of charting, so perhaps
applying some averaging is not an enormous leap in any case.
Later authors, such as Linda Bradford Raschke, have published modifications for the Keltner channel, such as
different averaging periods; or an exponential moving average; or using a multiple of Wilder's average true range
(ATR) for the bands. These variations have merit, but are often still just called Keltner channel, creating some