Trading is, of course, inherently risky. Therefore, forex traders need to be careful in making any decisions in trading. Using trading indicators is one of the strategies to minimize the risk. Chaikin volume indicator is one of so many trading oscillators that the traders can use based on the past performance. Past performance in trading does necessarily determine future performance, but analyzing past performance may help traders in making better predictions on the future trends.
What Is Chaikin Volume Indicator?
As the name suggests, Chaikin volume indicator was developed by Marc Chaikin. This is a volume-based oscillator, which works to confirm the current price action and helps the traders to warn upcoming price reversal. The oscillator refers to factors in the closing price in relation of the highest, the lowest, and average prices. Chaikin oscillator helps the traders to mitigate the risks associated with price reversals, which may harm trading positions.
The Chaikin oscillator works based on the concept of Moving Average Convergence Divergence (MACD), which is derived from the moving average. The concept of moving average has been discussed in a previous post. It refers to the mean price of a stock on a certain period of time.
If stocks AA closed at $24 on Wednesday, $25 on Thursday, and $26 on Friday, the Moving Average would be simply $25 on the three-day period. However, determining Chaikin oscillator requires additional steps. It uses MACD to determine the momentum of accumulation/distribution line to predict when the line will change direction.
How Is Chaikin Volume Indicator Used?
Of course, a three-day trend is not enough to make accurate prediction. Chaikin Volume Indicator may result better price reversal prediction when calculated using longer Exponential Moving Average (EMA). Again, the Chaikin oscillator supports buy and sell decisions in a better way when used in combination with other oscillators.
In conclusion, Chaiking volume indicator is a third-derivative technical analysis. The indicator is produced from another indicator, which is derived from stock price. It is a third-level indicator. Therefore, other indicators will determine how the traders can make better predictions on price trends.