1. Theory – how to use the indicator
Developed by Mark Chaikin
This is an oscillator indicator, which measures the accumulation/distribution of money in and out of currency pairs. This indicator is based on the fact that the closer the closing price is to the price high, the more the currency pair accumulates. Also, the closer the closing price is to the price low, the greater the distribution of the currency pair.
This indicator is positive if the price always closes above the midpoint of the bar while the volume increases.
However, if the price consistently ends below the midpoint of the bar as the volume increases, the indicator becomes negative.
Technical Analysis of the Chaikin Oscillator
A crossover above zero means accumulation of the currency pair. A value above +10 is a buy/bullish signal. A value above +20 indicates that the market is in a strong upward trend.
A zero line cross below zero indicates the distribution of the currency pair. A value less than -10 is a short sell/sell signal. A value below -20 indicates that the market is in a strong downward trend.
Trendline break with Chaikin’s money flow indicator
The money flow indicator can be used to confirm trendline breaks. support/resistance levels I’ll take a rest.If the price breaks the rise trend lineForex traders should wait for a confirmation signal from indicator values below -10.
If the price breaks out of the downtrend line, the forex trader should wait for a confirmation signal from the indicator value above +10.
Divergences between money flow indicators and prices often indicate a pending reversal of market direction. However, as with all divergences, it is best to wait for a confirmation signal before trading any divergence. A bullish divergence signal occurs when the Chaikin Money Flow indicator makes higher lows while the price makes lower lows. A bearish divergence signal occurs when the price forms higher highs while the Chaikin Money Flow indicator forms lower highs.
2. Practical examples
The Chaikin Oscillator or Volume Cumulative Oscillator consists of the difference between two exponential moving averages (usually 3 and 10 days) of the Cumulative Distribution Line indicator and is used to check price movements or divergence of price movements. The Chaikin Oscillator is more accurate than the On Balance Volume Indicator.
- On-Balance Volume: Add all the day’s volume if the stock closes positive, subtract all the day’s volume if the stock ends low, even if the stock ends just a penny higher.
- Chaikin Oscillator: Considers the closing price relative to the high, low and average price to determine the appropriate proportion of the day’s volume.
The main purpose of the Chaikin Oscillator is to confirm price trends and warn of impending price reversals. The Nasdaq 100 ETF QQQQ chart below shows these confirmation and divergence signals.
High #1 to High #2
The Nasdaq 100 ETF QQQQ has made new highs, which is usually a bullish sign. However, the Chaikin Oscillator failed to reflect QQQQ’s rise and finally made new lows. This bearish divergence heralded an imminent price reversal.
High #2 to High #3
QQQQ sharply cut its highs. The Chaikin Oscillator also made lower highs to confirm QQQQ’s downtrend.
Low #1 to Low #2
The Nasdaq 100 made a big low, but the Chaikin Oscillator made an even lower low. This bullish divergence indicates that the previous downtrend may have ended.
The Chaikin Oscillator is a volume-based technical indicator that helps you ascertain current price movements and predict future price reversals. Another technical indicator similar to Chaikin Oscillator is On Balance. volume indicator
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