The Chaikin Oscillator uses the MACD formula to measure the momentum of the Accumulation/ Distribution line. This makes the Chaikin Oscillator an indicator of an indicator.
Developed by the Marc Chaikin, the indicator is the difference between 10-day and 3-day EMAs of the Accumulation/Distribution line. The indicator is designed to anticipate the trend changes in the Accumulation/Distribution line by measuring the momentum behind the movement. Chaikin Oscillator generates the signal with bullish and bearish divergences and also crosses above/below the zero lines. Analysts also use this indicator to monitor the inflow and outflow of the money in the market. By comparing the money flow with the price action helps them in identifying the market tops and bottoms.
Moving Average Convergence Divergence
MACD is one of the most popular technical indicators in the market. EMAs are different from the MA because the EMA gives more weight to the recent price data. Thus helping us in getting a better picture of the short term trend. MACD is calculated by subtracting the 26-day EMA from the 12-day EMA. A 9-day EMA of the MACD is also calculated, which acts as a signal line, and is used to identify ‘buy’ and ‘sell’ signals.
Accumulation/Distribution line shows the relationship between the buyers and sellers of currency. This is done by analysing the divergence between the price and the corresponding volume. First of all, the money flow multiplier is identified by finding the difference between the low price and the closing price of the series range. Next, we need to find out the difference between the closing price of the range and the high price. Then, subtract the former from the latter and divide the resulting value with the low price and the high price of the range. Finally, the accumulation/distribution is found by multiplying the money flow multiplier with the traded volume of the asset for that specific period. By adding the current period money flow volume to the existing accumulation/distribution line, you obtained the new accumulation/distribution line.
All of this explanation is just for your understanding of how this line is calculated. You don’t have to go in-depth to understand the calculations as all of them are automatically calculated in the backend.
The Chaikin Oscillator
Marc Chaikin says the volume analysis helps us in identifying the strength and weaknesses of the price action. Most of the traders believe that the price and volume rise and fall simultaneously. The Chaikin’s Oscillator is then finally measured by subtracting the 10-day EMA of the MACD accumulation/distribution line from the 3-day EMA of the MACD accumulation/distribution line.
Chaikin Oscillator = (3-day EMA of ADL) – (10-day EMA of ADL)
Money Flow Multiplier = [(Close – Low) – (High – Close)] /(High – Low)
Money Flow Volume = Money Flow Multiplier x Volume for the period.
ADL = Previous ADL + Current Period’s Money Flow Volume
Installing ‘Chaikin Oscillator’ in MT4 (step – by – step process)
By default, the Chaikin Oscillator is not available in the MT4 Terminal, but it is available on the internet. Follow the link below to download the indicator.
Download the zip file from the link and extract the file and paste it to your MT4 directory/MQL4.
Make sure to paste the file in the ‘indicators’ folder.
Restart your MT4 Terminal.
Click on the Insert > Indicator > Custom > Chaikin Oscillator.
As you can see in the image below, we have applied the ‘Chaikin Oscillator’ on an AUD/USD One hour chart.
Chaikin Oscillator trading strategies
Chaikin Oscillator and RSI Strategy
Chaikin is basically an indicator of an indicator. So we suggest you not to use this indicator standalone. It often lags, and if you use the lower period settings, it gives a lot of false signals. In this strategy, we have paired the Chaikin Oscillator with the RSI indicator. RSI stands for the Relative Strength Index, and it is quite a popular indicator in the traders’ community. RSI is also an oscillator, and it oscillates between the 0 to 100 level. RSI reading above 70 indicates the overbought conditions, and the reading below 30 indicates the oversold conditions.
So the strategy is to see if the RSI is either at the overbought or oversold areas. Also, we need the Chaikin Oscillator to be above or below the zero-line to indicate a potential buy or sell signal.
For ‘buy’ signal, look for the RS I’s sharp reversal at the oversold area. Also, we need the Chaikin oscillator to cross below the zero-line to give us the buy signal in the market.
Look at the image below, the RSI is giving us a sharp reversal, and the Chaikin oscillator crosses the zero line. This means, both the indicators are giving us a potential ‘buy’ signal. We suggest you book your profits when the RSI shows the reversal sign at the overbought area and don’t forget to use the Stop Loss order to protect your account. The recent low is the best place to put the Stop Loss.
For ‘sell’ signal, look for the RS I’s sharp reversal at the overbought area. Also, we need the Chaikin oscillator to cross above the zero-line to give us the sell signal in the market.
Look at the image below. The market was in an overall downtrend. During the pullback phase, the RSI indicator is giving us the reversal at the overbought area. At the same time, Chaikin Oscillator also crosses the zero line. This is a potential ‘sell’ signal for us.
Chaikin Oscillator and RSI Divergence
Divergence is when the price of the currency is moving in one direction, but the indicator is moving in another direction. Divergence tells us that the current price of the currency is weakening, and a trend reversal is expected in the market. The divergence can either be bullish or bearish.
When the prices print a higher high, but the indicator fails to follow the price, it means the uptrend is weakening, and the price reversal may happen soon. This is known as the bearish divergence. When the price is printing a lower low, but the indicator is going sideways or not making a lower low, it is an indication that the downtrend is losing its momentum and the indicator is showing us the signs of price reversal. This is known as bullish divergence.
Below, we have paired the RSI and Chaikin Oscillator to identify the best divergence in the market. In the below chart, you can see that the prices were making the lower low, and the momentum of the trend was also quite weak. But both of the indicators were not making any lower low as they are in a consolidation phase. Hence it can be considered as the bullish divergence.
The Chaikin Oscillator is a momentum indicator for the Accumulation Distribution line. The indicator is designed to anticipate the trend changes in the Accumulation Distribution line by measuring the momentum behind the movements. This indicator gives us the trading signals in two ways.
1. When the indicator crosses the zero line from above, it is a ‘sell’ signal, and when it crosses the zero line from below, it can be considered as a ‘buy’ signal.
2. This indicator also generates the signals of both Bullish and Bearish divergence in the market.
We suggest you use this Chaikin Oscillator in conjunction with any of the other reliable indicators or with the pure price action. Do you have more strategies to use this indicator apart from the ones mentioned above? Please let us know in the comments below.