The Chaikin Oscillator Technical Indicator
Posted by Edward Dy on July 4th, 2008
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Photo credit forexpaul2
Developed by Marc Chaikin, the Chaikin Oscillator’s purpose was to compare an asset’s volume and price levels. The Oscillator is useful in determining whether an asset is overbought or oversold and as well as in indicating upcoming reversals.
To solve for a Chaikin Oscillator chart, the first thing a trader should do is create an Accumulation/Distribution Line or A/D line for a particular asset. The A/D line is taken from an index called the close location value, or CLV, the purpose of which is to compare high, low as well as close prices.
If the close price is greater than the midpoint of the high-low range, the CLV will have a positive value; on the other hand we will have a negative value for the CLV if the close price is less than the midpoint.
A cumulative total of the CLV multiplied by the volume of the asset will result in an A/D Line, which will be high when both volume and closing prices are high and low when volume and closing prices are low, as pressure is exerted in either direction on the asset.
The Chaikin Oscillator is a ten-period moving average of the price of a particular asset minus a three-day moving average of the recently-generated value of the A/D line.
When the value of the oscillator is high, the A/D line will be relatively low compared to the price of the asset. This indicates that the pressure to sell is increasing and that a price reversal is about to happen. Conversely if the opposite occurs, there will be an increase in the buying pressure and a price increase will be unavoidable.
By utilizing the Oscillator, traders can determine the appropriate time to sell or buy and thus take advantage of the imminent reversal.
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