Technical Analysis: Chaikin Oscillator

Technical Analysis: Chaikin Oscillator

Chaikin Oscillator: Definition, Calculations, Trading, Benefits, And Limitations

Volume, indicating total buying and selling transactions in the markets, is considered to be one of the most fundamental elements of financial markets. Supply and demand, and therefore volume, is behind all price movements. From the past to the present, volume-based indicators have been created to support the determination of the future price movements of the market. The main purpose of such indicators is to determine the direction in which prices are likely to move in the future by analyzing them on a volume basis around certain parameters. The Chaikin Oscillator, widely used among traders as a volume-based indicator, enables volume-based analysis of prices and logical trading decisions to be made with the results obtained. With this article we have prepared for you, you can easily access the definition of the Chaikin Oscillator, its calculations, how it can be used in trading, and its advantages and disadvantages.


What Is A Chaikin Oscillator?

As many traders point out, in financial markets, price follows volume levels. The Chaikin Oscillator is also seen as a way to integrate volume data into the technical analysis. Periods, when the correlation between price and volume is not accurate, can be interpreted as a sign of major changes in the trend. In this context, traders supported by the Chaikin Oscillator can make more accurate investment decisions and regulate their risk levels.

 

Who Created The Chaikin Oscillator?

The Chaikin Oscillator was created by Marc Chaikin, an American stock trader and technical analyst. Marc Chaikin’s main goal was to assess the accumulation and distribution of money flows on a financial asset to get an idea of future price movements. 


What Is The Formula Of The Chaikin Oscillator?

Different steps are necessary for traders to know how to calculate the Chaikin Oscillator:

  • N = [(Close – Low) – (High – Close)] / High – Low
  • M = N * Volume (Period)
  • ADL = M (Period – 1) + M (Period)
  • CO  = (3–day EMA of ADL) – (10-day EMA of ADL)

 

Four different key inputs are used when performing the calculation of the Chaikin Oscillator. The values in the above formula can be explained as follows:

 

N = Money flow multiplier: The amount of trading volume to be affected by the Accumulation/Distribution Line (ADL).

M = Money flow volume: This product reveals the amount of money traded, weighted by how close the closing price was to the high or low of the day. Whether the closing price is higher or lower as a result of the calculation shows traders the level of buyer or seller activity in the current market.

ADL = Accumulation/Distribution Line: Refers to the cumulate flow of money into or out of the security.

CO = Chaikin Oscillator

 

How To Calculate The Chaikin Oscillator?

The calculation of the Chaikin Oscillator involves four separate steps:

  1. First, the Money Flow Multiplier is calculated.
  2. Then the Money Flow Multiplier is multiplied by the volume level in the preferred time frame and the Money Flow Volume is identified.
  3. The total Money Flow Multipliers are listed to determine the ADL.
  4. Although it is usually specified as 3 and 10 days, the Chaikin Oscillator value is obtained by subtracting the long-term moving average from the short-term exponential moving average of the ADL in flexible time frames.


How To Use A Chaikin Oscillator In Trading?

Traders use the Chaikin Oscillator in their technical analysis for many different reasons. The CO provides insights on many topics such as divergences between price and volume, trend confirmations, and breakouts.

Divergences: As an oscillator based on the relationship between volume and price, the Chaikin Oscillator reveals divergences in the case of an inverse correlation. For example, an increase in the CO value when prices are declining indicates a bullish divergence, while a decrease in the CO indicator when prices are rising is interpreted as a bearish sign.

Trend Confirmation: Financial assets can move in three different trends: uptrend, downtrend, and finally sideways trend. Volume is of great importance for confirmation of trend continuation or trend reversals. Traders who utilize CO can benefit from the power of volume to make decisions about the strength and continuation of the trend.

Breakouts: Although the changes in the trend are referred to as breakouts, in financial markets, these trend changes can sometimes be fakeouts. To avoid such situations, CO is used to confirm possible breakouts with the support of volume. 


What Are The Benefits Of The Chaikin Oscillator?

 

Trading Signals: The Chaikin Oscillator provides traders with information on when it is more optimal to trade. For example, when the value of the Oscillator falls below zero, it is a reference to the fact that the market is not a favorable environment to execute a trade. By incorporating the Chaikin Oscillator into their trading strategies, traders can manage their risk levels more proportionately by avoiding overtrading.

Trend Momentum: Given that it operates as a volume-based indicator, the Chaikin Oscillator can provide traders with insights into the momentum and strength of the trend. When the Chaikin Oscillator rises above the zero line, it provides information that supports the price increase of the relevant financial asset, while a fall below zero may indicate a price decline. The Chaikin Oscillator is frequently used by traders for trend following.

Detection of Divergences: When the price of a financial asset moves inversely to indicator levels, it is called a divergence. The main purpose of well-known and frequently used oscillators such as RSI and MACD is to provide traders with insights into their next trades by detecting divergences in the price. The Chaikin Oscillator stands out as another important indicator used in the detection of divergences. A decline in the oscillator while the price of a financial asset is increasing indicates that a decline in the price will occur shortly.


What Are The Limitations Of The Chaikin Oscillator?

 

Lagging: Moving averages provide delayed signals for market movements based on past price movements. Since moving averages are used in the calculations and use of the Chaikin Oscillator, the results obtained may be delayed.

False Signals: Please properly integrate the Chaikin Oscillator into trading strategies to avoid traders making incorrect inferences. The timeframes used and geopolitical events occurring during the period in which the oscillator is used may mislead the oscillator data with very sudden price movements and signal wrong trading decisions.

Inefficiency in Sideways: Like the other oscillators, the Chaikin Oscillator requires rising or falling price movements to generate a signal. In the case of price movements within a certain range, oscillators may not be able to generate trading signals.


How Does A Chaikin Oscillator Work?

The Chaikin Oscillator operates as a volume-based indicator that compares the accumulation/distribution momentum of a stock with price movements. Since it contains many different data and provides traders with many signals in trading situations, the indicator stands out as one of the most frequently used ones for technical analysis. As with other oscillators, there is a zero line on the Chaikin Oscillator. The crossovers that occur on the zero-line provide traders with comprehensive information about the direction and strength of the trend.


How Can The Chaikin Oscillator Identify Stock Price Trends And Reversals?

Chaikin Oscillator’s divergence detections are used to detect ongoing trends and possible trend reversals in stock prices. The inverse ratio between the price and the oscillator may create a divergence, indicating that a change in the trend may occur. For example, a bearish movement of the Chaikin Oscillator during a period of rising prices indicates that the rise in prices may be a fakeout. Trading is therefore very important for traders to pay attention to divergence data when trading.


Is The Chaikin Oscillator Accurate And Reliable?

The Chaikin Oscillator is considered to be an effective indicator with the contribution of the Accumulation/Distribution Line within its structure. However, to ensure the accuracy of the results obtained from the Chaikin Oscillator, appropriate market conditions must be met. For example, in extremely volatile environments with very sharp market movements, there is usually an unpredictable external cause influencing price movements. This variation and sudden movements may cause the results obtained from the indicator to be less accurate. While the suitability of market conditions is important in ensuring the correct integration of the Chaikin Oscillator into trading strategies by obtaining the most accurate results, it is of great importance to use it together with other indicators to confirm the results obtained.

 

FAQ

How can I add the Chaikin Oscillator to the charts?

The Chaikin Oscillator is available in the indicators section of many trading platforms. If CO is selected as an indicator to be displayed, it will automatically appear on the chart.

 

Can the Chaikin Oscillator be used in any timeframe?

Yes, the Chaikin Oscillator can be used on all timeframes, depending on traders’ strategies.

 

Can the Chaikin Oscillator be applied to all financial instruments?

Yes, the Chaikin Oscillator can be used for all financial instruments.

 

Is the Chaikin Oscillator suitable for all traders?

The Chaikin Oscillator is an indicator suitable for traders of all levels, as it does not involve complex formulas and is easy to understand.

 

Are the time intervals used in the Chaikin oscillator fixed, 3, and 10 days?

No, the time intervals used in the Chaikin Oscillator, typically 3 days and 10 days for the exponential moving averages, are not fixed and can be customized.

 

Disclaimer

Eurotrader doesn’t represent that the material provided here is accurate, current, or complete, and therefore shouldn’t be relied upon as such. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their advice.

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