How To Use Chaikin Oscillator (CHO or CO)
Chaikin Oscillator is a volume indicator and was developed by Marc Chaikin who based its design on work performed by Joe Granville and Larry Williams.
Larry Williams’s A/D Indicator was prominent up to the early 1970s but depended on opening share prices that were published daily by the press. However, when this practice ceased, the indicator became more difficult to use so Chaikin improved the design by producing a new oscillator based on the average day price.
The Chaikin Oscillation is the difference of the 10 day exponential moving average (EMA) and 3 day EMA of the Accumulation/Distribution Indicator.
The Chaikin Oscillator registers accumulation if the daily close is above the day’s average high and posts distribution if the day’s close is lower the day’s average l
Discrepancies between CHO and price indicate that a price directional change would be imminent.
High Chaikin Oscillator values demonstrate that accumulation is active whilst low CHO values indicate that distribution is prominent. CHO readings and price are highly correlated such that when price rises, volume accumulation climbs as well. In contrast, if CHO values fall so does price.
Chaikin Oscillator is therefore an indicator that can be used to forewarn of potential reversals in price action and as such is a very valuable tool if used correctly. Chaikin did, however, recommend that his oscillator should be used with other indicators that are capable of validating its trading recommendations.
To optimize your use of the Chaikin Oscillator, you must understand that volume can be considered as the fuel of any price action. As such, if accumulation and price are both rising, this action will not be sustained if the CHO starts recording falling values.
In addition, the Chaikin Oscillator allows you to analysis its recent historical data that can also assist you in detecting market tops and bottoms. Chaikin’s research concluded that, without doubt, his CHO’s main attribute with regards to technical analysis, is its ability to signal market tops and bottoms when CHO reading start to diverge away from the current price directio
The Chaikin Oscillator can also be used to detect new trade opportunities as follows. For instance, if price is rising and the CHO value is negative but beginning to turn, then this is indicative of a potential buying opportunity. Likewise, should the CHO value be above zero but the price is falling, then this can be viewed as a possible selling trade.
However, caution is advised using the Chaikin Oscillator because it is an indicator based on an indicator. As such, you are advised to confirm all CHO’s recommendation by using another indicator such as the moving average.
Some important interpretations of CHO readings are as follows. The CHO peaks when price cannot rise any further and starts to retract. Low CHO readings reflect low volatility and are associated with market flat-lining. If the CHO values record consequent highs then price is also rising. A rapid decrease in volatility indicates that market interest is waning and that a reversal could be imminent.