Chaikin Volatility (CHV):
Chaikin's volatility indicator calculates the spread between the maximum and minimum prices.
It judges the value of volatility basing on the amplitude between the maximum and the minimum. Unlike Average True Range, Chaikin's indicator doesn't take gaps into account.
According to Chaikin's interpretation, a growth of volume indicator in a relatively short space of time means that the prices approach their minimum (like when the securities are sold in panic), while a decrease of volatility in a longer period of time indicates that the prices are on the peak (for example, in the conditions of a mature bull market).
We recommend using Moving Averages and Envelopes as a confirmation of Chaikin's indicator signals.
Author: MetaQuotes Software Corp.
In 1966, stockbroker Marc Chaikin commenced his career on Wall Street. Successful
and bright, he started to look into technical analysis as an alternative to fundamental
research. He was the one that came up with several financial indicators that nowadays
took his name. Now famous, the Chaikin Oscillator, the Chaikin Accumulation/Distribution
indicator, the Chaikin Persistence of Money Flow indicator and the Chaikin Volatility
indicator are used by traders across the world to analyze and forecast market movements.
The Chaikin Volatility Indicator (CVI) is helpful in determining the value extent
between high and low prices on a certain period of time. It measures the volatility
of a market which means it shows the predictability percentage of that market. Different
from the Average True Range, the CVI does not take into considerations the trading
gaps.In general, Chaikin Volatility Indicator is used in conjunction with a moving average
system and on a given period of time, commonly 10 days.
In trading, the Chaikin Volatility indicator is used to quantify the degree of certitude
about the next market progression. Calculated as the percent change in a moving
average of the high versus low price over a given time, the CVI may forecast a market
top and a bottom. As the indicator increases in value, the market is highly volatile
(uncertain, variable) and it could predict a market bottom. Contrarily, as the CVI
decreases and it ranges a narrow band, the market is said to be less volatile, more
secure and prone to reach a top. A market bottom is reached when prices vary a lot
from a short time period to another (hours, days) and people become anxious and
begin to sell securities. The market top is a secure and flourishing moment with
high prices (or a price explosion expected), also which follows a bull market and
is determined over a longer time period by the high CVI.
As the Chaikin Volatility indicator measures the instability of the stock market,
its high values indicates that prices are changing fast and a lot during the day.
Prices are constant when the indicator has low values. Basically, the flatter the
CVI line on a graph, the more constant and secure the prices are.
A graphed market time period may have level prices or trendy prices. When a market
is choppy, prices are variable and the market is insecure and contrarily, a trendy
market tends to have an explosion/implosion of prices, following a trend –
going up, or down. Both trendy and choppy markets can have high or low volatility
on a certain time period, hence the 10 day generally used interval. This way, traders
can better observe the true volatility of the market.
Sometimes, elevated volatility values are used in forecasting a trend reversal,
such as a turning point in the market. Volatility peaks and abysses determine market
tops and bottoms, points after which a new trend begins, be it upwards or downwards.
Consequently, inferior volatility levels may be used to reflect the beginning of
an upward price trend, which usually happens after a market consolidation period.
Although some traders believe that markets movements are random, there are several
mathematical rules that apply. Stockbroker Marc Chaikin has used simple mathematics
to find financial indicators that are helpful in forecasting market trends. With
the Chaikin Volatility Indicator, traders everywhere may input data in a facile
formula to calculate and estimate when markets reach tops and bottoms. The CVI is
calculated by the recurrence of price movements (high vs. low) on a time period.
As the indicator rises, so does the market volatility (can be triggered by massive
security sales) which in turn triggers a chain reaction followed by a bear market,
that in the end leads to a market bottom; as the CVI decreases and its line flattens,
the market loses volatility and becomes more secure, ergo prices begin to increase,
which consequently create a bull market, that usually leads to a market top.