Marc Chaikin devised the Chaikin Oscillator as a means to assess the relationship between volume and price levels of an asset. This indicator serves to identify instances where an asset may be either overbought or oversold, thereby signaling potential reversals in its price trend.
To calculate a Chaikin Oscillator chart, traders typically begin by creating an Accumulation/Distribution Line (A/D Line) for a given asset. This line stems from a metric known as the close location value (CLV), which assesses high, low, and close prices. If the closing price surpasses the midpoint of the high-low range, the CLV registers as positive; conversely, if the closing price falls below the midpoint, the CLV reflects a negative value.
Key Takeaways
- Accumulation/Distribution Line (A/D Line): This line is derived from the close location value (CLV), which assesses whether the close price is above or below the midpoint of the high-low range. CLV is multiplied by volume to generate the A/D Line. High A/D Line values indicate high pressure in either direction on the asset.
- Chaikin Oscillator Calculation: The Chaikin Oscillator is calculated by taking a ten-period moving average of the asset’s price minus a three-day moving average of the A/D Line’s value.
- Interpretation: When the Oscillator is at a high value, it suggests that selling pressure is increasing relative to the asset price, indicating a potential price reversal. Conversely, a low Oscillator value suggests increasing buying pressure and a potential price increase.
- Trading Implications: Traders can use the Oscillator to help determine optimal times to buy or sell assets, either to take advantage of price reversals or to avoid potential losses.
Overall, the Chaikin Oscillator provides valuable insight into the relationship between price and volume dynamics, helping traders make more informed decisions in the market.
What Does the Chaikin Oscillator Tell You?
The Chaikin oscillator serves as a valuable tool predominantly for technical analysts rather than fundamental analysts, who delve into a company’s business performance to glean insights into its future stock price direction. While fundamental analysts prioritize being extensively informed to forecast market movements, technical analysts contend that all pertinent information is already factored into stock prices. They rely on discernible patterns in equity price fluctuations to forecast market trends, with the Chaikin oscillator aiding in identifying directional momentum trends.
To grasp the function of an oscillator, consider it akin to attending an auction. On one side, you have accumulators or buyers, while on the opposite side, distributors or sellers are present. When sellers outnumber buyers, the auctioned item’s price typically declines, whereas a predominance of buyers tends to drive up the item’s price.
Technical analysts maintain that the equilibrium between buyers and sellers fundamentally steers financial markets. They gauge this equilibrium using various indicators, including accumulation-distribution metrics such as the Chaikin oscillator.
Example of How to Use the Chaikin Oscillator
The Chaikin oscillator serves the purpose of discerning underlying momentum amidst fluctuations in accumulation and distribution. It diverges from conventional methods by applying the MACD indicator to accumulation-distribution dynamics rather than focusing solely on closing prices.
For instance, consider a scenario where a trader aims to gauge whether a stock’s price is poised to rise or fall, and the MACD trend indicates an upward trajectory. In such cases, the Chaikin oscillator manifests a bullish divergence upon crossing above a designated baseline, known as the accumulation-distribution line. This crossover signifies a phase of accumulation among traders, typically indicating a bullish sentiment.
The Chaikin oscillator operates on the premise of two primary buy and sell signals. Firstly, a positive divergence is affirmed through a center-line crossover above the accumulation-distribution line, indicating a potential buying opportunity. Secondly, a negative divergence is confirmed when the center line crosses below the accumulation-distribution line, signaling a potential selling opportunity.
A positive divergence suggests an impending rise in stock price due to increased accumulation, while a negative divergence indicates a potential decline in stock price owing to heightened distribution.