What is the Chaikin Oscillator?
The Chaikin oscillator is named after its creator Marc Chaikin. The oscillator measures the accumulation-distribution line of the moving average convergence-divergence (MACD). To calculate the Chaikin oscillator, subtract a 10-day exponential moving average (EMA) of the accumulation-distribution line from a 3-day EMA of the accumulation-distribution line. This measures the momentum predicted by oscillations around the accumulation distribution line.
- The Chaikin indicator applies MACD to the accumulation-distribution line instead of the closing price.
- A cross above the accumulation-distribution line indicates that market players are accumulating stocks, securities or contracts, which is usually bullish.
The formula for the Chaikin oscillator is:
North=High–Under(Close–Under)–(High–Close)SUBWAY=N * Volume(Period)ADL=SUBWAY(Period–1)+SUBWAY(Period)CO=(3-day EMA of ADL)–(ADL 10-day EMA)where:N = money flow multiplierM = volume of money flowADL = Accumulation Distribution LineCO = Chaikin oscillator
How to calculate the Chaikin oscillator?
Calculate the accumulation-distribution line (ADL) in three steps. The fourth step produces the Chaikin oscillator.
- Calculate the money flow multiplier (N).
- Multiply the money flow multiplier (N) by volume to calculate the money flow volume (N).
- List a running total of N to draw the accumulation-distribution line (ADL).
- Calculate the difference between the 10-period and 3-period exponential moving averages to calculate the Chaikin oscillator.
What does the Chaikin oscillator tell you?
The Chaikin oscillator is a tool for technical analysts rather than fundamental analysts, who study the business performance of a company to obtain information on the future direction of its share price. Fundamental analysts believe that the skill needed to forecast the market is about being more informed. Technical analysts believe that all known information is already priced in stocks and that patterns in the ups and downs of stock prices can better predict market movements. Technical analysts use the Chaikin oscillator to find directional trends in momentum.
To appreciate how an oscillator is used, imagine that you are at an auction. On one side of the room are accumulators or buyers. On the other side of the room are the distributors or vendors. When there are more sellers in the room than buyers, the price of the auctioned item decreases. Also, when buyers are the majority, the price of the item tends to rise.
Technical analysts believe that the balance of this relationship is what drives financial markets. They measure this balance between buyers and sellers with multiple indicators, including accumulation-distribution indicators such as the Chaikin oscillator.
Example of how to use the Chaikin oscillator
The purpose of the Chaikin oscillator is to identify the underlying momentum during fluctuations in the accumulation distribution. Specifically, it applies the MACD indicator to accumulation-distribution rather than closing prices.
For example, a trader wants to determine whether the price of a stock is more likely to rise or fall and the MACD is trending up. The Chaikin oscillator generates a bullish divergence when it crosses above a baseline. The baseline is called the accumulation-distribution line. A cross above that line indicates that traders are accumulating, which is usually bullish.
The Chaikin oscillator uses two main buy and sell signals. First, a positive divergence is confirmed with a cross of the center line above the accumulation-distribution line, indicating a potential buying opportunity. Second, a negative divergence is confirmed with a cross of the center line below the accumulation-distribution line, indicating a potential selling opportunity.
A positive divergence indicates that the stock price is likely to rise, given the increase in accumulation. A negative divergence indicates that the stock price is likely to fall, given the increase in distribution.