Much like other technical analysis tools, the Chaikin Oscillator was designed to help predict future asset price movements – particularly identifying turning points in an asset price. It is sometimes mistakenly called the Chaikin volatility indicator.
The Chaikin Oscillator attempts to achieve this by observing momentum in asset volume flows by measuring the accumulation/distribution line of the moving average convergence divergence (MACD).
This makes it an indicator of an indicator – ostensibly granting investors the benefit of two technical analysis tools.
That's a lot of jargon to digest in one go, so let's break that down a little.
Moving average convergence divergence
This is a common technical analysis tool using shorter term exponential moving averages (EMA). An EMA differs from a simple moving average by giving more weight to the most recent data so that a better picture of short-term price trends can be identified.
Therefore, instead of using the longer-term 50- or 200-day moving averages, the MACD is calculated by subtracting the 26-day EMA from the 12-day EMA. A nine-day EMA of the MACD is then calculated and plotted on top of the MACD - this is called the "signal line", and is used as a buy or sell signal.
This is a tool that explores the relationship between buyers (accumulators) and sellers (distributors) of an asset by analysing divergences between price and volume flow.
First, the “money flow multiplier” is identified by calculating the difference between the closing price and the low price of the series range (a number of days for a longer-term assessment, or one- to five-minute intervals for day trading purposes).
Next, find the difference between the high price and the closing price of the range. Then, subtract the latter from the former and divide the resulting value by the difference between the high price and the low price of the range.
Finally, the Chaikin money flow volume, or the accumulation/distribution, is found by multiplying the money flow multiplier by the traded volume of the asset for the period.
The new accumulation/distribution line is obtained by adding the current period's money flow volume to the existing accumulation/distribution line.
The Chaikin Oscillator is born
Don't worry about the calculations, however. Capital.com does all of this for you and the Chaikin Oscillator of any of the assets we trade can easily be charted at the click of a button on our CFD trading platform.
This oscillator was named after its creator Marc Chaikin, a former stock broker and founder of Chaikin Analytics, who believes traded volumes form an integral part of the internal dynamics of any given market.