With an objective to assist traders in measuring the momentum of the accumulation distribution line (MACD), Marc Chaikin developed the Chaikin oscillator. The oscillator uses accumulation/distribution (ADL) and two exponential moving averages with a varying length to the line. With these variants, the oscillator is used by traders to have a clear prediction of a trend change in the markets under review.
With the knowledge of the indicator, traders are able to make informed market decisions whenever they wish to trade. Critical signals are generated which gives clear guidance to the trader on the move to make in the market. A signal is generated when the Chaikin oscillator signal crosses below or over the zero or when there are bullish or bearish divergences. Knowledge of noting the momentum changes is critical to traders as they can anticipate change in trend since a momentum change is always associated with a change in direction.
Features of The Chaikin oscillator
The moving averages concept inspires the oscillator. Some significant features of the oscillator include the following:
- Accumulation distribution line
- Money flow volume
- Money flow multiplier
- Closing and buying price
- Moving average convergence divergence
Calculation of The Chaikin Oscillator
In the calculation of the indicator, you need the following variants: (Try out indicators on Tradingview.com)
N= Money Flow Multiplier
M= Money Flow Volume
ADL = Accumulation distribution line
CO=Chaikin Oscillator
Where:
N= [(Close – Low) – (High – Close)] / (High – Low)
M= Money Flow Multiplier * Volume for the Period
ADL= Previous ADL + Current Period’s Money Flow Volume
CO= (3-day EMA of ADL) – (10-day EMA of ADL)
What Does the Chaikin Oscillator Tell You?
During the development of this indicator, it was inspired by the idea that buying and selling price could be determined during the close of a period by relating it to its low/high. The indicator is a momentum indicator of an accumulation-distribution line as opposed to the price.
When the Chaikin signal crosses above zero, it indicates that there is net buying pressure. On the other hand, when the signal crosses below zero, it indicates selling pressure. The most common signals are the divergence between the indicator and pure price movements, vital in flagging a market turning point.
Chaikin Oscillator Indicator | Indicator Series Click To TweetHow to Use the Chaikin Oscillator
Every trader wants their decision to be positively impactful when trading. With the use of the indicator, look for the following:
Crosses
An impending trend reversal might be indicated when the oscillator crosses the zero line. When the oscillator crosses from below the zero lines to the above the zero, it is a bullish cross resulting in a price rise. On the other hand, if the oscillator crosses from above the zero lines to the zero, it is a bearish cross that results in a fall in price.
Divergence
When there is a difference in what the price indicates and what the indicator indicates, the Chaikin divergence occurs, indicating an impending reversal. If the indicator makes a new high and makes a new low, a bullish Chaikin oscillator is generated. On the other hand, if the oscillator makes a new high and the price makes a new high, a Bearish Chaikin Oscillator Divergence
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