## How to Use the Chaikin Oscillator

Price follows volume, according to an old axiom of investing. When an unusually large number of shares of a stock are bought, it doesn’t make sense for sellers to unload at the current price. The theory goes that, if investors are buying aggressively, the stock’s desirability and scarcity ought to yield higher prices.

In some respects, this is nothing more than Economics 101 – examining supply and demand curves and the point at which they intersect. Since supply and demand are functions of quantity and price, it seems counterintuitive to notice fluctuations in one element without paying attention to the other element.

## MACD and the Chaikin Oscillator

So what is the best way to reconcile increasing or decreasing volume with price fluctuations? No one has a definitive answer, but Marc Chaikin has come close. This long-time stock trader and analyst has created dozens of indicators during his distinguished career, with many of them now staples of Wall Street technical analysis. His best known and most popular is the Chaikin Oscillator.

The Chaikin Oscillator is a third-derivative technical analysis indicator – an indicator of an indicator, the latter of which is derived from the stock price. The oscillator builds on the concept of moving average convergence divergence or MACD. MACD is derived from the moving average, which is the mean price of an issue over a certain period.

For example, if stock XYZ closed at $22 two days ago, $23 yesterday and $24 today, the simple moving average (SMA) would be $23. The exponential moving average (EMA), its more complicated sibling, weighs recent prices more heavily than older prices. While the SMA in the above example is $23, the EMA would be higher due to the rise in price at the end of the series.

In practice, the exponent is notated as a *smoothing factor*, i.e. a coefficient between 0 and 1, indicating the relative weight given to the most recent prices. A smoothing factor of 1 ignores all but the latest closing price, while a smoothing factor of 0 weighs all days equally (and the EMA would equal the SMA). Standard smoothing factors for calculating the exponential moving average are 0.05 or 0.1. Many analysts use both and take the average of those inputs.

MACD is constructed by subtracting a 26-day EMA from a 12-day EMA. MACD’s purpose is to distinguish short-term from long-term trends, allowing educated guesses about future stock prices.

## Chaikin Oscillator Construction

The transition from MACD to Chaikin Oscillator requires several steps. The Chaikin Oscillator was created in reference to the *accumulation/distribution line (acc/dis line)*, another Chaikin brainchild. The acc/dis line builds on the *money flow multiplier*, which attempts to quantify the amount of money coming into the market and its impact on stock prices.

Lets say the stock in the previous example peaked at $25 during the look back period and then fell to $21. A day later, it closed at $22. The money flow multiplier in this case would be [ ( 2 2 − 2 1 ) − ( 2 5 − 2 2 ) ] ( 2 5 − 2 1 ) = − . 5 \frac<[(22 -21) - (25 - 22)]> <(25 - 21)>= -.5 ( 2 5 − 2 1 ) [ ( 2 2 − 2 1 ) − ( 2 5 − 2 2 ) ] = − . 5

Multiply that number by the quantity of stock traded over the period to get *money flow volume*, while the running total generates the acc/dis line. The final step is to apply this output to MACD.

1. Determine a security’s high, low and closing prices over a certain period.

2. Add, subtract and divide them as above, then multiply by volume over that period.

3. Do this for each day in the period, then measure the progress (or regress, as the case may be).

4. Subtract the 26-day EMA from the 12-day EMA.

5. Subtract the 3-day EMA from the 10-day EMA of #4 and plot.

The result is a value that, regardless of its starting point or the price of the underlying security, has an origin of 0. (A perfectly inert market = neither negative nor positive Chaikin Oscillator values.)

What the oscillator lacks in simplicity, it makes up for in authority. By measuring the momentum of the accumulation/distribution line using the MACD, the oscillator should anticipate when the line will change direction. By now, we’re several levels removed from the stock price, but Chaikin devotees argue that the distance is needed to determine the importance of volume and price changes. Also, three- and 10-day values aren’t locked in stone. For example, swapping in six- and 20-day EMAs will result in a Chaikin Oscillator that changes direction less abruptly.

## Chaikin Oscillator Example

The 3,10 Chaikin Oscillator plotted below Wal-Mart’s three-year weekly price bars identifies three major turning points, ahead of or concurrent with price action. The indicator dropped to a yearly low and turned higher in October 2020. signaling the end of a multi-month decline while signaling a buying opportunity. A five-month pullback into 2020 set off a similar buying signal that preceded the strongest rally in several years. Finally, the indicator hit the highest high in many years in November 2020 and turned sharply lower while price rallied to an all-time high, generating a bearish divergence that preceded a major decline into the second quarter of 2020.

## The Bottom Line

The Chaikin Oscillator generates technical output that supports sound buy or sell decisions but is best used in conjunction with fundamentals and other indicators. (For additional reading, check out: *How to Use Volume to Improve Your Trading*.)

## Chaikin Oscillator Definition

## What is the Chaikin Oscillator?

The Chaikin oscillator is named for its creator Marc Chaikin. The oscillator measures the accumulation-distribution line of 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 momentum predicted by oscillations around the accumulation-distribution line.

### Key Takeaways

- The Chaikin Indicator applies MACD to the accumulation-distribution line rather than closing price.
- A cross above the accumulation-distribution line indicates that market players are accumulating shares, securities or contracts, which is typically bullish.

## The Formula for the Chaikin Oscillator is:

## How to Calculate the Chaikin Oscillator?

Calculate the accumulation-distribution line (ADL) in three steps. The fourth step yields the Chaikin Oscillator.

- Calculate the Money Flow Multiplier (N).
- Multiply the Money Flow Multiplier (N) by volume to calculate Money Flow Volume (N).
- List a running total of N to draw the accumulation-distribution line (ADL).
- Compute the difference between 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 more than for fundamental analysts, who study a company’s business performance to garner information about the future direction of its stock price. Fundamental analysts believe that the skill needed to forecast the market is about being the most informed. Technical analysts believe that all known information is already priced into stocks and that patterns in the ups and downs of equity prices can better predict the market’s movements. Technical analysts use the Chaikin oscillator to find directional trends in momentum.

To appreciate how an oscillator is utilized, imagine that you’re at an auction. On one side of the room are accumulators or buyers. On the other side of the room are the distributors or sellers. When there are more sellers in the room than buyers, the price of the item being auctioned declines. Likewise, when buyers are in the majority, the item’s price tends to increase.

Technical analysts believe the balance of this relationship is what drives the financial markets. They measure this balance between buyers and sellers with multiple indicators, including accumulation-distribution indicators like the Chaikin oscillator.

## Example of How to Use the Chaikin Oscillator

The purpose of the Chaikin oscillator is to identify underlying momentum during fluctuations in accumulation-distribution. Specifically, it applies the MACD indicator to accumulation-distribution rather than closing prices.

For example, a trader wants to determine whether a stock price is more likely to go up or to fall and MACD is trending higher. 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 typically bullish.

The Chaikin oscillator utilizes two primary buy and sell signals. First, a positive divergence is confirmed with a center-line crossover above the accumulation-distribution line. signaling a potential buying opportunity.. Second, a negative divergence is confirmed with a center-line crossover below the accumulation-distribution line., signaling a potential selling opportunity

A positive divergence signals a stock price is likely to rise, given the increase in accumulation. A negative divergence signals a stock price is likely to fall, given the increase in distribution.

## Chaikin Oscillator

Language: | English • Русский |
---|

## Contents

## DEFINITION

The Chaikin Oscillator is, at its core, an indicator of an indicator. The Chaikin Oscillator takes Accumulation/Distribution (ADL) and applies two Exponential Moving Averages of varying length to the line. The Chaikin Oscillator’s value is then derived by subtracting the longer term EMA of the ADL from the shorter term EMA of the ADL. Ultimately this serves as a way to measure the momentum of the ADL by plotting a line which fluctuates between positive and negative values. Being aware of changes in momentum can help a trader or technical analyst to anticipate trend changes since changes in momentum often precede changes in trend.

## HISTORY

The Chaikin Oscillator technical indicator was created by famed stock analyst Marc Chaikin. The Chaikin Oscillator has become closely related to two of Chaikin’s other famous indicators; Chaikin Money Flow and Accumulation/Distribution (ADL).

## CALCULATION

## THE BASICS

Chaikin believed that buying and selling pressures could be determined by where a period closes in relation to its high/low range. If the period closes in the upper half of the range, then buying pressure is higher and if the period closes in the lower half of the range, then selling pressure is higher. This is what the Money Flow Multiplier determines (step 1 in the calculation above). The Money Flow Multiplier is the key to all of Chaikin’s technical analysis tools. Money Flow Multiplier determines The Money Flow Volume, which in turn determines the direction of the ADL, which ultimately determines the direction and value of The Chaikin Oscillator.

**As previously mentioned, The Chaikin Oscillator calculates a value that fluctuates between positive and negative values.**

**When The Chaikin Oscillator’s value is above 0, ADL’s momentum and therefore buying pressure is higher.****When The Chaikin Oscillator’s value is below 0, ADL’s momentum and therefore selling pressure is higher.**

## WHAT TO LOOK FOR

## Crosses

When The Chaikin Oscillator crosses the Zero Line, this can be an indication that there is an impending trend reversal.

**Bullish Crosses occur when The Chaikin Oscillator crosses from Below the Zero Line to Above the Zero Line. Price then rises.**

**Bearish Crosses occur when The Chaikin Oscillator crosses from Above the Zero Line to Below the Zero Line. Price then falls.**

## Divergence

Chaikin Oscillator Divergence occurs when there is a difference between what price action is indicating and what The Chaikin Oscillator is indicating. These differences can be interpreted as an impending reversal.

**Bullish Chaikin Oscillator Divergence is when price makes a new low but the Chaikin Oscillator makes a higher low.**

**Bearish Chaikin Oscillator Divergence is when price makes a new high but the Chaikin Oscillator makes a lower high.**

## SUMMARY

Chaikin Oscillator is an indicator of an indicator. It uses Accumulation/Distribution (ADL) and takes it a step further. The ADL measure buying/selling pressure and the Chaikin Oscillator adds in the element of momentum. Because momentum often precedes changes in price or trend, it should always be taken into consideration by technical analysts when possible. However, like with most indicators, The Chaikin Oscillator is at its best when it is not used as a stand-alone technical indicator but in conjunction with additional indicators and chart analysis.

## HOW TO USE IN TRADINGVIEW

**Navigate to https://www.tradingview.com/****On the landing page, enter a symbol and click «Launch Chart»****Within the Toolbar along the top of the chart select «Indicators» and choose the one you would like to add to your chart.****To make changes to your Indicator you will need to access the Formatting Window.****You can access the Formatting Window by either clicking on the Blue «Format» button in the Chart Header next to the Indicator name, or by right clicking on the Indicator in the chart itself and selecting «Format».**

## INPUTS

### Fast Length

The time period to be used in calculating the shorter term EMA.

### Slow Length

The time period to be used in calculating the longer term EMA.

## STYLE

### Chaikin Oscillator

Can toggle the visibility of the Chaikin Oscillator Line as well as the visibility of a price line showing the actual current value of The Chaikin Oscillator. Can also select The Chaikin Oscillator Line’s color, line thickness and visual type (Line is the default).

Can toggle the visibility of the Zero Line. Can also select the Zero Line’s value, color, line thickness and visual type (Dashes are the default).

### Precision

Sets the number of decimal places to be left on the indicator’s value before rounding up. The higher this number, the more decimal points will be on the indicator’s value.

## PROPERTIES

### Last Value on Price Scale

Toggles the visibility of the Indicator Value on the vertical axis.

### Arguments in Header

Toggles the visibility of the indicator’s name and settings in the upper left hand corner of the chart.

### Scaling

Scales the indicator to either the Right or to the Left.