Developed by Marc Chaikin, the Chaikin Oscillator measures the momentum of the Accumulation Distribution Line using the MACD formula. This makes it an indicator of an indicator. The Chaikin Oscillator is the difference between the 3-day EMA of the Accumulation Distribution Line and the 10-day EMA of the Accumulation Distribution Line. Like other momentum indicators, this indicator is designed to anticipate directional changes in the Accumulation Distribution Line by measuring the momentum behind the movements. A momentum change is the first step to a trend change. Anticipating trend changes in the Accumulation Distribution Line can help chartists anticipate trend changes in the underlying security. The Chaikin Oscillator generates signals with crosses above/below the zero line or with bullish/bearish divergences.
First and foremost, it is important to remember that the Chaikin Oscillator is an indicator of an indicator. It measures momentum for the Accumulation Distribution Line. This makes it at least three steps removed from the price of the underlying security. First, price and volume are reshaped into the Accumulation Distribution Line. Second, exponential moving averages are applied to the Accumulation Distribution Line. Third, the difference between the moving averages is used to form the Chaikin Oscillator. As the third derivative, the indicator is more prone to disconnect from the price of the underlying security.
Having clarified that, the indicator is designed to measure the momentum behind buying and selling pressure (Accumulation Distribution Line). A move into positive territory indicates that the Accumulation Distribution Line is rising and buying pressure prevails. A move into negative territory indicates that the Accumulation Distribution Line is falling and selling pressure prevails. Chartists can anticipate crosses into positive or negative territory by looking for bullish or bearish divergences, respectively.
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Chaikin Oscillator can be used both separately and together with other indicators in the Strategy Builder.