What is Chaikin Oscillator
The Chaikin oscillator is named for its creator, Marc Chaikin. The oscillator measures the accumulation/distribution line of the moving average convergence divergence (MACD). To calculate the Chaikin oscillator, you subtract a 10-day exponential moving average (EMA) of the accumulation/distribution line from a three-day EMA of the accumulation/distribution line. This highlights the momentum implied by the accumulation/distribution line.
BREAKING DOWN Chaikin Oscillator
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 that the balance of this relationship is what drives the markets. And they measure the balance between buyers and sellers with multiple indicators, including accumulation/distribution indicators like the Chaikin oscillator.
Chaikin Oscillator Usage Example
The purpose of the Chaikin line is to identify momentum level amid the accumulation/distribution line of the MACD indicator. Specifically, it is the MACD applied to the accumulation/distribution line rather than prices.
For instance, suppose a trader wants to determine whether a stock price is more likely to go up or to fall, and the MACD is trending up according to the chart. The Chaikin oscillator demonstrates a positive divergence with a cross above the baseline. The baseline is called the accumulation/distribution line. A cross above that line means traders are accumulating, which is typically a buy signal.
The Chaikin oscillator has two primary signals. One is a positive divergence, confirmed with a center-line crossover above the accumulation/distribution line, like in our example. The second signal is a negative divergence confirmed with a center-line crossover below the accumulation/distribution line. A positive divergence signals a stock price is going up given the increase in accumulation. A negative divergence signals that the share price is falling because of a decline in accumulation.