A Python CCI Trading Strategy (Backtest)

Introduction

This article will implement a trading strategy utilizing the Commodity Channel Index (CCI) indicator. It will review the underlying theory. Subsequently, it will explain the procedure in Python for implementing the trading strategy on the SPY; furthermore, it will implement the same strategy for 25 different financial instruments.

The main purpose of this article is to show how it can be done by using Python – not the strategy itself. You might want to check out all our other relevant Python trading strategies with rules.

Commodity Channel Index (CCI)

The Commodity Index Channel is a trading indicator that measures how far the price level is concerning an average price from the same financial instrument. In 1980, Donald Lambert developed this indicator to identify cyclical trends in the commodity market, but later on, its popularity spread to other types of financial assets.

CCI = \frac{{\text{{Typical Price}} - \text{{20-period SMA Typical Price}}}}{{0.15 \times \text{{Mean Absolute Deviation (Typical Price)}}}}

Where:

\text{Typical Price} = \frac{\text{High} + \text{Low} + \text{Close}}{3}

The use of 0.15 ensures a value of the indicator in the range of -100 and 100 in approximately 70% to 80% of the cases. The number of periods to calculate the SMA will influence how likely the indicator will fall between -100 and 100; a higher number of periods makes it more likely to lie in that interval, while a lower number of periods makes it less likely to lie in that interval.

Python Example

Warning

This tutorial reuses and simplifies the Commodity Channel Index implementation of the ta Python package adapted for Python learners. You can go and check the original implementation and compare it with the version of this tutorial.

Importing libraries and Downloading Python Data

As in the previous tutorials, the first part is to import the Python libraries and download the historical financial data as follows:

The output is:

Estimation Commodity Index Strategy in Python

This Commodity Index Channels Python implementation will have:

1 A function to estimate the Typical Price get_typical_price

2 A function to estimate the Mean Absolute Deviation mad

3 A function to estimate the CCI run_CCI

The following image shows how to use the run_CCI function to calculate the CCI indicator; this function has five parameters: high, low, close, window, and constant. The inputs high, low, and close are all of type pd.Series; if you do not provide a pd.Series for the previous variables, Python will generate an error; this procedure prevents you from adding the wrong data types.

Meanwhile, the inputs window and constant are restricted to be integer and float, respectively. Subsequently, typical_price is the average of high, low, and close; next, sma_tp is the 20-day moving average of the typical price pandas series.

Then, putting all the pieces together, we obtain the Commodity Channel Index (CCI). It is worth mentioning that the typical_price.rolling(window).apply(mad, True) expression indicates the calculation of a 20-day Mean Absolute Deviation pandas series.

The implementation run_CCI(high =result[“High”], low = result[“Low”], close = result[“Close”]) yields:

Trading Strategy

The strategy to implement is:

  • Initiate a long position when the Commodity Channel Index (CCI) is below -100, and maintain the position until the CCI crosses above 100.
  • Initiate a short position when the Commodity Channel Index (CCI) is above 100, and maintain the position until the CCI crosses below 100.

The following image illustrates the signal calculation process. The calculate_signals function has one parameter CCI_values; this parameter must be a  pd.Series (pandas series). In the function body, the logic is to append to the signals Python list the variable position; when CCI is lower than -100, position is one (position=1); and when CCI is higher than 100, position is minus one (position=-1).

The value position=1 indicates a long position, and position=-1 indicates a short position. Finally, signal = calculate_signals(result[“CCI”]) implements the previous function.

The output is:

The following image shows how to calculate and plot the equity curve of this trading strategy. You can check in the section Calculate Strategy Performance of this tutorial the explanation of the previous code.

The chart:

Testing the Strategy Using 25 ETFs

This section will implement the same trading strategy with the following financial instruments:

The aim is to estimate the profit and loss for each financial instrument. The provided image illustrates the process for calculating and adding the cumulative returns into the Pandas data frame results.

The following image shows the list of the 25 ETFs to use. The purpose is to illustrate how Python can save you time and implement the same trading strategy for multiple financial instruments.

The following code shows the implementation of our trading strategy for multiple financial instruments. The multiple_etf_CCI function has two parameters etf_list and window.

In the function body, we create an empty list series_returns = [] to add the total return of each financial instrument. Subsequently, the code shows this iteration (for security_name in etf_list). Inside the loop, the Python code calculates each of the procedures already implemented in this tutorial; one aspect to highlight is that last_total_return_ = data[“Cummulative Returns”].iloc[-1] shows the profit and loss from the last day of trading an append it in series_returns.append(last_total_return_); next, the Python routine will wait 1.01 seconds time.sleep(1.01) to request data from the next financial instrument. Yahoo Financial will block your requests to download financial data if you make multiple requests in less than one second. Finally, series_.plot.bar() implements a bar plot with the total returns.

The following image shows the profit and loss for each financial instruments. The number of financial instruments with positive returns is 6 out of 25.

FAQ:

What is the Commodity Channel Index (CCI) indicator?

The Commodity Channel Index (CCI) is a trading indicator developed by Donald Lambert in 1980. It measures the distance of the price level from an average price, helping identify cyclical trends in the commodity market and other financial assets.

How is the CCI calculated in Python?

The CCI in Python is calculated using the formula: CCI = (Typical Price – 20-period SMA Typical Price) / (0.15 * Mean Absolute Deviation (Typical Price)). The Typical Price is the average of high, low, and close prices, and the SMA is the 20-day moving average.

What is the purpose of the provided Python example in the tutorial?

The Python example demonstrates the implementation of the CCI indicator using the ta Python package. It includes functions to estimate Typical Price, Mean Absolute Deviation, and the CCI itself, along with a trading strategy based on CCI signals.

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