If you need a way to spot changes in trends quickly and reliably, one indicator that could help you out is the Chaikin Oscillator.
In this guide, we will explain what this indicator is, how it is calculated and how you can use it in your Forex trading.
The Chaikin Oscillator indicator applies the MACD formula to assessing the momentum of another indicator called the Accumulation-Distribution Line (ADL).
The indicator takes its name from Marc Chaikin, its creator.
By helping you identify where momentum may be shifting, the Chaikin Oscillator lets you know when a reversal may be on its way.
Key point: The Chaikin Oscillator indicator measures the momentum of another indicator called the Accumulation-Distribution Line.
Calculating the Chaikin Oscillator can get to be a bit complicated, because first, you need to calculate the Accumulation-Distribution Line (ADL).
Here are the steps for calculating the ADL.
The first step is to calculate the Money Flow Multiplier (MFM):
Then the Money Flow Volume (MFV) can be calculated using the Money Flow Multiplier (MFM) obtained above:
The ADL at the current period (i) is calculated based on the ADL at the previous period (i + 1) and the Money Flow Volume (MFV):
Now you can calculate the Chaikin Oscillator using the following formula:
where EMA is the exponential moving average.
There you go! Thankfully, you do not need to worry about doing these complicated calculations yourself, though it can be useful to see the formula to have a better understanding of the Chaikin Oscillator. Your trading platform will do the math for you so you can plot the indicator with just a few clicks.
Key point: Calculating the Chaikin Oscillator involves first calculating the ADL, and then subtracting the 10-day EMA of the ADL from the 3-day EMA of the ADL.
When you plot the Chaikin Oscillator, you will see it below your chart. The line oscillates above and below 0 (zero).
If you wished, you could also plot the 3-day and 10-day EMAs of the ADL yourself directly on the chart. If you did, you would notice that every time the 3-day EMA crosses under the 10-day EMA, the oscillator goes below 0. Each time the 3-day EMA rises above the 10-day EMA, the oscillator moves above 0.
It is important to note that the Chaikin Oscillator is not a direct comment on price. Instead, it is informing you about the ADL.
If the oscillator is negative, it means that the ADL is dropping, and selling pressure is prominent. If the oscillator is positive, it means that ADL is rising, and buying pressure is prominent.
Key point: The Chaikin Oscillator helps you identify whether buying or selling pressure is stronger.
Here is how to add the Chaikin Oscillator to your MetaTrader 4 charts in a few simple steps:
Key point: It takes only a few clicks to put the Chaikin Oscillator on your Forex charts.
The Chaikin Oscillator may generate bullish or bearish signals. You can detect them by looking for divergence between the oscillator and price.
Notice in this example that price didn't immediately go up after crossing zero (and in fact, earlier, it crossed zero and dropped again). But if you waited for the third crossover, you'd have bought right into the new bullish trend.
There can be issues with false starts and delays when trading with this indicator, thus why waiting for confirmation is helpful.
You can see this is an example of a cleaner trade. The price plunges instantly at the crossover.
Key point: By looking for divergence between the oscillator and price, you can identify bullish and bearish trade setups.
Now you have a pretty good idea how to use the Chaikin Oscillator. But there are a few important caveats of which you should be aware.
Key point: When you are using the Chaikin Oscillator, it is important to keep its limitations in mind. But used correctly, it can be a great tool in your trading toolbox.
The Chaikin indicator can help you spot trend changes. Now you are familiar with the Chaikin Oscillator and how it can help you spot reversals via divergence with price. Smooth out the indicator by changing the moving averages or await confirmation before your entries to get the most effective use out of the Chaikin Oscillator.
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