How to use the Chaikin oscillator

When big investors buy stocks and buy them aggressively, their demand should generate higher prices in the future, making stocks a wise investment.

In some ways, this is nothing more than Market 101: Checking supply and demand. Since price is a function of demand, tracking the fluctuations of one element without paying attention to another element seems counterintuitive. This is where the Chaikin Oscillator comes in. It checks the closing price and buying and selling pressure to determine the potential demand for the stock.

The Chaikin oscillator was invented by Marc Chaikin, a long-term stock trader and analyst who created dozens of indicators during his outstanding career, many of which are now the main content of Wall Street technical analysis.He designed the shock indicator as a way to measure the accumulation or distribution of securities by institutional investors (investors who drive the market).

Key points

  • The Chaikin Oscillator checks the strength of price changes and potential buying and selling pressures to provide a reading of the demand for securities and possible turning points in prices.
  • The divergence between the price and the Chaikin Oscillator is the most common signal of this indicator, and it usually marks a short-term price reversal.

How the Chaikin oscillator works

The Chaikin Oscillator is essentially a momentum indicator, but it is a cumulative distribution line, not just a price. It looks at the intensity of price changes and potential buying and selling pressures within a specific time period.

A reading of the Chaikin Oscillator above zero indicates net buying pressure, while a reading below zero indicates net selling pressure.The difference between indicators and pure price changes is the most common Signals from indicators, And often mark a turning point in the market.

Chaikin oscillator construction

The oscillator is based on the concept of moving average convergence divergence or MACD. MACD is derived from the moving average, which is the average price of a certain problem in a certain period of time.

The transition from MACD to Chaikin Oscillator requires several steps. The creation of the Chaikin oscillator is referenced Accumulation/distribution, Another Chai Jin’s creativity. The acc/dis line is built on Money flow multiplier, It attempts to quantify the amount of funds entering the market and its impact on stock prices.

The multiplier formula is as follows:



F

=




[


(


Close





 Low


)





(


High





 Close


)


]



(

High



low

)




f = frac{[(text{Close} – text{ Low}) – (text{High} – text{ Close})]} {(text{high}-text{low})}


F=(High low)[(Close Low)(High Close)]

Suppose the stock in the previous example reached a peak of $25 during the period under review and then fell to $21. One day later, it closed at $22.In this case, the flow of funds multiplier will be






[


(


2


2





2


1


)





(


2


5





2


2


)


]



(

2

5



2

1

)



=



.

5


fracture{[(22 -21) – (25 – 22)]}{(25-21)} = -.5


(2521)[(2221)(2522)]=.5

Multiply this number by the number of stocks traded during the period to get Money flow, And the running total generates the acc/dis line. The last step is to apply this output to MACD.

Chai Jin believers

The oscillator lacks simplicity, it makes up for its authority. By using the MACD model to measure the momentum of the accumulation/distribution line, the oscillator should predict when the line will change direction. So far, we have removed several levels from stock prices, but believers in Chai Jin believe that distance is needed to determine the importance of quantity and price changes.

In addition, the value of three days and ten days is not static. For example, swapping the 6-day and 20-day EMA will cause the direction of the Chaikin Oscillator to change less suddenly.

Bottom line

The technical output produced by the Chaikin oscillator supports reasonable buying or selling decisions, but it is best used in combination with fundamentals and other indicators. (For more reading, please check: How to use trading volume to improve your trading.)

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