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Indicators: Chaikin Oscillator (CHO)

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Automated-Trading 2009.12.25 14:03 

Chaikin Oscillator (CHO):

Chaikin's Oscillator (CHO) is the difference of moving averages of Accumulation/Distribution.

"The concept of this oscillator is based on three main theses.

  1. First: if a share or an index is higher when it closes than it was during the day (you can calculate the average value as [max+min]/2), it means that it was a day of accumulation. The closer the closing index of a share or an index gets to the maximum, the more active the accumulation is. Vice versa, if a share's closing price is lower than the average level of the day, it means that distribution took place. The closer to the minimum the share gets, the more active is the distribution.
  2. Second: stable price growth is accompanied by increase in trade volume and strong accumulation of the volume. As the volume is like fuel that feeds market growth, the lag of volume along with the growth of prices shows that there isn't enough fuel to continue the rise.
    Vice versa, a slump in prices is usually accompanied by low amount and ends up in panic liquidation of positions by institutional investors. Therefore, first of all we see a growth of volume, then a slump in prices accompanied by reduced volume and finally, when the market is close to foundation, some accumulation takes place.
  3. Third: with a Chaikin's oscillator you can trace back the volume of money resources coming in to the market and leaving it. Comparing the dynamics of volume and prices allows finding out peaks and foundations of the market, both short- and medium-term.

As there are no correct methods of technical analysis, I would recommend you using this oscillator along with other technical indicators. The reliability of short-term and medium-term trade signals will be higher if you use a Chaikin's oscillator together with, for example, Envelopes based on a 21-day moving average and some overbought/oversold oscillator.

Chaikin Oscillator

Author: MetaQuotes Software Corp.

Sergey Golubev
Sergey Golubev 2013.09.03 13:45  
Sergey Golubev
Sergey Golubev 2013.09.03 14:06  

Chaikin Oscillator

The Chaikin Oscillator or Volume Accumulation Oscillator consists of the difference between two exponential moving averages (usually 3 and 10-day) of the Accumulation Distribution Line indicator and is used to confirm price movement or divergences in price movement. The Chaikin Oscillator is more accurate than the On Balance Volume indicator.

  • On Balance Volume: adds all volume for the day if the close is positive, even if the stock closed only a penny higher or subtracts all volume for the day if the stock closes lower.
  • Chaikin Oscillator: factors in the closing price in relation to the highs, lows, and average price and determines the appropriate ratio of volume to be attributed to the day.

The main purpose of the Chaikin Oscillator is to confirm price trends and warn of impending price reversals. The chart below of the Nasdaq 100 ETF QQQQ illustrates these confirmation signals and divergence signals:

High #1 to High #2

The Nasdaq 100 ETF QQQQ made higher highs, usually a bullish sign. However, the Chaikin Oscillator failed to mirror the QQQQ's advance higher and ended up making a lower low. This bearish divergence forewarned of the impending price reversal.

High #2 to High #3

The QQQQ's made a significantly lower high. The Chaikin Oscillator confirmed the QQQQ's downtrend by making a lower high as well.

Low #1 to Low #2

The Nasdaq 100 made significant lower lows, yet the Chaikin Oscillator made higher lows. This bullish divergence signaled that the previous downtrend may have ended.

The Chaikin Oscillator is a helpful volume based technical indicator that helps confirm the current price action or foreshadow future price reversals. Other technical indicators similar to the Chaikin Oscillator is the On Balance Volume indicator
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