Chaikin Oscillator

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Patent #: US 7,831,984 B2
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The Accumulation/Distribution Line was developed by Marc Chaikin. The problem with it is that it is based on the cumulative factor and, during a prolonged trend, changes become small in comparison to the actual Accumulation/Distribution Line value. Chaikin Oscillator (named after its creator) is the next step in accumulation/distribution concept and allows you to analyze buying and selling pressure in smaller, but unchanging, numbers.

The basis of the Accumulation/Distribution concept is that, depending on the location of the closing price in relation to the High and Low prices for a defined period, a technician may consider trading volume during the same period as an accumulation (positive money flow, bullish volume) or as a distribution (negative money flow, bearish volume). If the closing price is in the upper half of a period's range, we have accumulation, but if a stock (security) closes in the lower half of the period's trading range, we have distribution.

Chaikin Oscillator calculations are based on applying fast (shorter bar period settings) and slow (longer bar period settings) exponential moving averages to the Accumulation/Distribution line and calculating the difference between them:

Chaikin Oscillator = (fast exponential MA of Accumulation/Distribution) - (Slow exponential MA of Accumulation/Distribution)

The principles of Chaikin Oscillator calculation are similar to those of MACD. As the MACD-Histogram is used in technical analysis to show moving average crossovers in MACD, so the Chaikin Oscillator is used to see changes in the Accumulation/Distribution Line. Furthermore, most of the principles used in MACD to generate trading signals can be used in trading system based on the Chaikin Oscillator.

As a rule, a Bullish (Buy) signal can be generated on positive divergences, while a negative divergence will generate a Bearish (Sell) signal. At the same time, center line crossovers can be used to generate signals: a Bullish signal when the Chaikin Oscillator moves above the zero line after having been below it and a Bearish signal when the Chaikin Oscillator drops below zero after having been above.

The Chaikin Oscillator adds momentum to the Accumulation/Distribution Line. However, it can be too volatile and very sensitive to the changes in the accumulation distribution line. If so, CMF (Chaikin Money Flow) or MFI (Money Flow Index) can be used. We recommend that you use this indicator in conjunction with other technical indicators.

Chart 1: Dow Jones Industrials (^DJI) - Chaikin Oscillator

The Chaikin Oscillator adds momentum to the Accumulation/Distribution Line, however, it could be too volatile and very sensitive to the changes in the accumulation distribution line. If this is the case CMF (Chaikin Money Flow) or MFI (Money Flow Index) could be used It is recommended using this indicator in conjunction with other technical indicators.

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