A Chaikin oscillator is a technical analysis indicator that measures the difference between the moving averages of the accumulation/distribution indicator and allows predicting changes in price direction.
The definition may seem complex, but in reality we are dealing with a simple concept. What it does is improve the other indicator, which is nothing more than a relationship between asset prices and their volume. In this way, it allows to know if the prices are going to change in the near future.
As with certain Japanese candlestick patterns, such as the morning star or the dragonfly doji candlestick, it needs other types of supportive analysis to be reliable. Even so, it is an invaluable help for the investor.
Chaikin Oscillator Calculation
It should be noted that Marc Chaikin was the creator of the indicators we mentioned, including the Chaikin oscillator. The calculation is not easy, but on any trading platform it can be done automatically. Still, let’s look at the steps that could be taken.
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- We start from the money flow multiplier or chaikin money flow in English. This indicates the volume of cash that has moved in the session and it is essential to know it.
- We draw the line of the other indicator, the accumulation/distribution. This reflects the relationship between prices and volume, but in advance.
- The oscillator will be calculated using the three and ten period moving averages. In this way, the difference between them will be the value of this indicator.
We have already mentioned that it measures a change in price direction, therefore, it is very relevant to take long or short positions (buy or sell). To use it, we have to look at where the prices are located on the chart.
If the price is in the upper area of the accumulation/distribution line (positive divergence) there is buying pressure that will end up raising prices. Conversely, if it goes below (negative divergence), the pressure will be selling and prices will fall.
Chaikin Oscillator Example
To finish, let’s look at an example. Imagine that we start from a bear market. Prices are going down and we want to know if their trend will change. In this way, we can find out if we should hold, in the example, our long-term buy positions.
The problem is that if prices go down, our portfolio can be damaged, hence the need to know if it will last. With the Chaikin oscillator, we see that there is a positive divergence and, therefore, prices are going to rise and we can consider holding.