Chaikin Oscillator description
Chaikin Oscillator, or CHO (fig. 1) is an indicator for Forex was created by the famous trader Mark Chaikin (CEO and founder of «Chaikin Analytics»), based on works of traders Joe Granville and Larry Williams, who considered the trading volume as the leading factors of the market dynamics:
Fundamentally CHO is a version of the Accumulation/Distribution (A/D) indicator, which was also developed by Chaikin. A/D shows at the closing price relative to the extremes for a certain period how buyers or sellers dominate on the market. The Chaikin oscillator is the difference between the values of the moving averages on the A/D indicator: slow and fast moving averages.
On the chart, the Chaikin oscillator is a broken line located under the main chart, the fluctuations of which up and down are estimated on a scale with negative and positive values relative to the zero level. In simple terms, this oscillator shows the acceleration of the dynamics of trading volume on Forex, which may indicate rapid changes in price dynamics. The volume in the oscillator formula makes it more sensitive than indicators of similar orientation.
Using the Chaikin oscillator in Forex market, you can create a trading system, but you will have to use tick data that differ from real volumes. The Chaikin oscillator is also associated with two other indicators created by its author – the Chaikin money flow and Accumulation/Distribution. Mark Chaikin’s developments are often called «hybrid» as they successfully combine elements and functions of other indicators.
Chaikin Oscillator on MetaTrader 5
On MT5 trading platform the Chaikin oscillator is in the list of pre-installed tools, to find it, you need to go to the tab «Insert», then to the section «Indicators», then to the «User-generated» and find CHO in the drop-down menu (fig. 2):
In the oscillator setup window, the basic parameters – quick МА – 3, slow МА – 10 are set, they are not recommended to be changed, at least until a trader feels confident in the market. Also in the settings you can change the calculation method MA — choose simple (SMA) or exponential (EMA).
For MT4 the oscillator can be downloaded free of charge from the source library in MT4 and MT5 languages, for example at https://www.mql5.com/en/code/19. First the file zip. Is downloaded, then it is moved to a folder MQL4 and downloaded from there directly to the terminal. You can also download the Forex robot for МТ5 (fig. 3). In particular, this adviser trades by signals of the 90-day moving average, MA.
First, you should download the zip.file, move it to MQL4 directory in the folder «Experts», then open the directory pressing the tab «File» of the terminal, and confirm the data merge. To run the adviser, you need to reboot the terminal.
After the terminal is rebooted, you need to go to the tab «Service» – «Settings» where you should allow automatic trading and DLL import. The activation of the automatic trading is executed via the relevant tab «Auto-trade». The Chaikin oscillator is «dragged» on the chart from the relevant navigation section. You can adjust your own settings in the adviser.
Chaikin Oscillator signals
The oscillator for Forex Chaikin is based on two assumptions. First, it is believed that if the closing price is higher than the average price for the day, the market goes through the accumulation stage, and if the closing price is lower than the average price for the day, the market goes through the distribution stage.
Secondly, it is assumed that the accumulation period is accompanied by an increase in volumes, but if the market grows and volumes fall, then we can expect a slowdown in the market soon. During the period of distribution, when the price decreases, the volumes fall slightly, but after a certain time of market decay, panic leads to a sharp increase in volumes. The greater the distance from the average price to the closing price, the greater the accumulation or distribution.
The Chaikin oscillator is used for trading in terms of divergence, differences between the indications of the price and the indicator. «Bearish» divergence is at which the price reaches the high points, while the indicator does not update the high points. Divergence is a difference regarding the indications of the price and indicator. The Chaikin oscillator is often used for accurate determination of divergences.
Bearish divergence occurs when the price continues to set new high points. The curve of the indicator does not update any high points. Bearish divergence indicates that the uptrend is coming to the end, but the oscillator signals require confirmation by additional indicators before entering the trading. Accordingly, bullish divergence is observed when the price reaches the minimum values, and the indicator does not reach the minimum. It means that the downtrend ends, but you should wait for confirmation of this assumption before entering the trading again.
A sufficiently reliable signal of the Chaikin oscillator is considered to be the intersection of the average level of the indicator: when the middle line crosses from the bottom up, it is a signal to the upward trend and to the opening of short positions. Conversely, when the middle line of the oscillator crosses from top to bottom, it is a signal to open long positions, as a downward trend may be formed (Forex signals).
Traders also evaluate the signals of the 90-day moving average. In this case, if the price is above it, and the oscillator is below it and is reversing up, then it may be a signal to buy. On the contrary, if the price is below the moving average and the indicator is above with a reversal down, it can be a signal to sell.
There is a popular recommendation that the author of the oscillator advises to follow when trading with it: signals on the medium-term trend are preferable to signals in the opposite direction. This is also true when the oscillator confirms a new high peak or lower limit in the opposite direction. Only the signal in the direction of the trend can be considered as a reason to buy or sell, the signal against the trend, as expected, may be not taken into account at all.
Trading strategies based on Chaikin Oscillator
Many traders consider that the Chaikin oscillator is so informative that it can be used in trading without additional indicators. It has many benefits, among which the most important is the ability to give leading signals, which is difficult to overestimate to determine the optimal points of entry into the market, except that the oscillator does not redraw the indications.
However, it is preferable to use the Chaikin oscillator with other indicators, because the Chaikin oscillator has a number of drawbacks, which also need to be known. For example, moving averages are short that leads to false signals, although the number of them can be reduced if you increase the period in the settings, but then the oscillator signals may be delayed. The oscillator can show sharp data spikes, often crosses the zero line, so it is difficult to interpret its signals correctly. It can also be delayed by sudden price changes. In particular, the Chaikin oscillator is effectively combined with Bollinger Bands, RSI, Stochastic, CCI and other similar tools.
The oscillator without additional indicators is successfully used on five-minute charts for high-frequency strategies, where the rules of technical analysis are more applicable, fundamental factors do not have time to influence the price. The simplest trading strategy with the use of the Chaikin oscillator is to make deals on the position of the oscillator – if it is above zero, this indicates an uptrend, if below zero – a downtrend. But this strategy is designed for trading on fairly long timeframes.
One of the strategies involves using an adaptive moving average AMA (fig. 4) together with the Chaikin oscillator. This tool is pre-installed on trading platforms. The AMA action is based on the display of averaging of the asset value over a certain period of time. The tool is effective in the analysis of the asset value chart.
In MT5 the AMA indicator as Moving Average is in the list of trend tools, it is also in the list of Williams’s indicators, but you should use exactly Adaptive Moving Average. If you intend to use AMA for trading on timeframes up to H1, there is no need to change the settings. On other timeframes it will be helpful to test how reliable the indicator displays signals.
The Chaikin oscillator is used to confirm trading signals AMA. Only after the oscillator confirms the signals, you can open a trade. For example, AMA shows a buy signal when the chart is above the indicator, the oscillator is built below the zero level, but directed upwards. Accordingly, the AMA signal to buy should be confirmed by an oscillator above the zero level which is directed upwards. Stop Loss is required.
Although, at first glance, this is a simple strategy that can be used by the beginners, a trader must have some trading experience to implement it stable and effective. The difficulty arises when you configure indicators on the time frames from 1H and in interpreting the signals of AMA and their confirmation by the Chaikin oscillator. The benefits of the strategy include the fact that the signals are not redrawn.
The strategy, in which the trader monitors the overbought or oversold state, implies that it is necessary to determine with horizontal lines the range in which the oscillator line is the overwhelming time. When the indicator touches one of these two lines, it may be worth opening a trade, considering that the price is likely to return to a limited range. The strategy is widely used with the classical indicator Moving Average, too. The point is to open trades when the Chaikin oscillator crosses the average value for a certain time; in this case you need MA.
The Chaikin oscillator is a universal hybrid indicator that can be effectively used in the Forex market. It has high sensitivity and can be used as a leading indicator. At the same time the Chaikin oscillator can produce false signals. Therefore, it is recommended to use it together with other indicators.