1. The Theory – How to Use Indicators
Developed by Marc Chaikin
This is an oscillator indicator, it measures the accumulation/distribution of money flowing in and out of a currency pair. The indicator is based on the fact that the closer the closing price is to the high of the price, the greater the accumulation of the currency pair. Also, the closer the closing price is to the price low, the greater the spread of the currency pair.
This indicator will be positive if the price closes firmly above the middle of the line with increasing volume.
However, if the price continuously closes below the midpoint of the bar with increasing volume, the indicator will be negative.
Chaikin Oscillator Technical Analysis
Buy a badge
A crossover above zero means a currency pair is rallying. A value above +10 is a buy/bullish signal. Prices above +20 signal a strong bullish market.
Sale sign
A zero line cross below zero means a currency pair split. A value below -10 is a short/sell signal. Prices below -20 signal a strong bearish market trend.
Trend Line Break with Chaikin’s Money Flow Indicator
The money flow indicator can be used to confirm a trend line break or support/resistance level brakes. If the price breaks up voltage lineforex traders should then wait for a confirmation signal from the index values below -10.
If the price breaks a downtrend line, forex traders should then wait for a confirmation signal from indicator values above +10.
Deviation negotiation
A divergence between the money flow indicator and price often signals a pending reversal in market direction. However, as with all divergences, it is best to wait for confirmation signals before trading the divergence. A bullish divergence signal occurs when price makes a lower low while the Chaikin Money Flow Indicator makes a higher low. The bearish divergence signal occurs when the price is higher, while the Chaikin money flow indicator makes a lower high.
2. Practical Example
The Chaikin Oscillator or Volume Accumulation Oscillator consists of the difference between two exponential moving averages (usually 3 and 10 days) 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 averages and determines the appropriate proportion 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 Nasdaq 100 ETF QQQQ chart below illustrates these confirmation 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 warned of the impending price reversal.
High #2 to High #3
QQQQ made a significantly lower high. The Chaikin Oscillator confirmed the downtrend of the QQQQ also making a lower high.
Low #1 to low #2
The Nasdaq 100 made significantly lower lows, however the Chaikin Oscillator made higher lows. This bullish divergence signaled that the previous downtrend may have ended.
The Chaikin oscillator is a useful volume-based technical indicator that helps confirm current price action or predict future price reversals. Other technical indicators similar to the Chaikin Oscillator are On Balance Volume indicator
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