Chaikin Oscillator

Name Type Prerequisite Use Cases
Chaikin Oscillator (CO) Volume/Momentum EMA Identifying momentum in volume flow.

Definition

The Chaikin Oscillator is a volume-based indicator that measures the accumulation-distribution of money flow into and out of a security. It is calculated as the difference between a 3-day exponential moving average (EMA) of the Accumulation/Distribution Line (ADL) and a 10-day EMA of the ADL. It helps identifying momentum in the buying or selling pressure.

Mathematical Equation

First, calculate the Accumulation/Distribution Line (ADL):

\[ \text{MF Multiplier} = \frac{(Close - Low) - (High - Close)}{High - Low} \]
\[ \text{MF Volume} = \text{MF Multiplier} \times \text{Volume} \]
\[ ADL = \text{Previous ADL} + \text{MF Volume} \]

Then, calculate the Chaikin Oscillator:

\[ \text{Chaikin Oscillator} = EMA_3(ADL) - EMA_{10}(ADL) \]

Special cases

  • Maximum possible value: Unbounded
  • Minimum possible value: Unbounded
  • Behavior: Oscillates around a zero line based on the momentum of the Accumulation/Distribution Line.

Visualization

Chaikin Oscillator

Trading Significance

  1. Centerline Crossover:

    • Bullish: Crossing above the zero line suggests money is flowing into the security (accumulation).

    • Bearish: Crossing below the zero line suggests money is flowing out (distribution).

  2. Divergence: Divergence between the indicator and price often precedes a reversal.

    • Bullish divergence occurs when price hits a new low but the oscillator makes a higher low.