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.
- 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:
N=High−Low(Close−Low)−(High−Close)M=N * Volume(Period)ADL=M(Period−1)+M(Period)CO=(3-day EMA of ADL)−(10-day EMA of ADL)where:N = Money flow multiplierM = Money flow volumeADL = Accumulation distribution lineCO = Chaikin oscillator
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.