Named after its creator, Marc Chaikin, the Chaikin oscillator is an oscillator that measures the accumulation/distribution line of the moving average convergence divergence (MACD). The Chaikin oscillator is calculated by subtracting a 10-day exponential moving average (EMA) of the accumulation/distribution line from a three-day EMA of the accumulation/distribution line, and highlights the momentum implied by the accumulation/distribution line.
Fundamental analysts study business performance to glean information about the future direction of stock prices. Fundamental analysts believe that the ability to predict the market is about being the most informed. Technical analysts believe that all known information is already priced into the market and that patterns in the movement of stock prices can help to predict the future. Technical analysts use the Chaikin oscillator to find directional trends in momentum.
To understand how the technical analyst uses the oscillator, imagine an auction. Accumulators or buyers are on one side, and distributors or sellers are on the other side. When there are more sellers in the room, the price of the item being sold goes down. Likewise, when there are more buyers in the room, the price of the item being sold tends to go up.
It is the balance of this relationship that drives markets. Analysts measure this relationship, the balance of buyers (accumulators), and sellers (distributors) with myriad indicators, including accumulation/distribution indicators such as the Chaikin oscillator.
The goal of the Chaikin line is to identify levels of momentum within the accumulation/distribution line of the MACD indicator – specifically, it is the MACD applied to the accumulation/distribution line rather than prices.
For example, assume a trader wants to know if the price of a stock is going up or down. According to the chart, the MACD is trending up. The Chaikin oscillator shows a positive divergence with cross above the baseline. The baseline is referred to as the accumulation/distribution line. A cross above the baseline means traders are accumulating, which is a buy sign.
The Chaikin oscillator has two main signals. The first signal is a positive divergence, confirmed with a center-line crossover above the accumulation/distribution line, as is the case in the example. The second signal is a negative divergence confirmed with a center-line crossover below the accumulation/distribution line. The positive divergence is a sign the price is going up due to an increase in accumulation. The negative divergence is a sign the price is going down due to a decrease in accumulation.
Being able to recognize momentum in accumulation and distribution patterns gives technical traders an edge that they can use to develop a theory they can capitalize on. The strength of the oscillator provides signals to analysts about the direction of prices in the future. To learn more about the Chaikin Oscillator, check out What's the difference between Chaikin Money Flow (CMF) and [Money Flow Index (MFI)?]