Chaikin Oscillator
Tue, Apr 15The Chaikin Oscillator was created by Marc Chaikin to assess the relationship between volume and price levels of an asset. This Oscillator can signal when an asset is overbought or oversold, thereby indicating potential reversals.
To construct a Chaikin Oscillator chart, a trader first calculates an Accumulation/Distribution Line (A/D Line) for the asset. The A/D Line is based on an index known as the close location value (CLV), which evaluates high, low, and close prices. If the closing price is above the midpoint of the high-low range, the CLV will be positive; conversely, if the closing price is below the midpoint, the CLV will be negative. By accumulating the CLV multiplied by the asset's volume, the A/D Line is generated, which is elevated when both closing prices and volume are high, and diminished when they are low, reflecting pressure in either direction on the asset.
The Chaikin Oscillator is then calculated as a ten-period moving average of the asset price minus a three-day moving average of the newly computed A/D Line value. When the Oscillator shows a high value, it indicates that the A/D Line is low in relation to the asset price, suggesting that selling pressure is rising and a price reversal is likely. In contrast, when the Oscillator displays a low value, it signifies increasing buying pressure, indicating that a price increase is also imminent.
Therefore, investors can utilize the Oscillator to identify the optimal moments to buy or sell an asset, allowing them to capitalize on or avoid potential reversals.
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