Introduction to the Chaikin Oscillator Indicator
Momentum is a function of volume and speed. In trading, this would be volume and the speed of price movements. Most indicators attempt to capture momentum using price movements alone. The Chaikin Oscillator is a momentum indicator which incorporates price movements and volume using the concept of Money Flow Volume.
What is the Chaikin Oscillator Indicator?
The Chaikin Oscillator is a momentum-based technical indicator which presents momentum direction as an oscillator. This indicator detects momentum based on Money Flow Volume using a complex formula which modifies the classic Moving Average Convergence and Divergence (MACD). It then plots a line which oscillates around its midline which is zero.
How the Chaikin Oscillator Indicator Works?
The Chaikin Oscillator formula first starts by computing for the Money Flow Multiplier, which is a complex formula computing for the ratio between the range of a period and the difference between the distance of the close and the low, as well as the high and the close. It then multiplies the Money Flow Multiplier with volume in order to arrive at the Money Flow Volume. It then adds the current Money Flow Volume with the previous Accumulation Distribution Line (ADL) in order to arrive at the current ADL. It then computes for a 3-bar moving average and a 10-bar moving average of the ADL. It then computes for the difference between the two. The resulting value would then be used to plot for the Chaikin Oscillator line.
How to use the Chaikin Oscillator Indicator for MT4
The Chaikin Oscillator has three variables which can be modified within its settings. It allows for the modification of the fast and slow moving average of the ADL using the “Slow Period” and “Fast Period” variables. It also allows the modification of the type of moving average used. It also allows traders to choose what type of moving average will be used using the “Type Smooth” variable. “0” stands for an SMA, while “1” is for an EMA.
Using the current preset of the Chaikin Oscillator, it is best used a momentum-reversal confirmation or a short-term trend reversal indicator. As such, its signals based on the crossing over of its line over its midline is best used in confluence with a long-term trend.
Buy Trade Setup
When to Enter?
In an uptrend market, open a buy order as the Chaikin Oscillator line crosses above zero. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as the Chaikin Oscillator line crosses below zero.
Sell Trade Setup
When to Enter?
In a downtrend market, open a sell order as the Chaikin Oscillator line crosses below zero. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as the Chaikin Oscillator line crosses above zero.
Conclusion
The Chaikin Oscillator can sometimes seem erratic especially on choppy markets with short momentum pulses. However, in the right market condition, its signal can also produce trade setups that could lead to high yields.
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