Mark Chaykin is one of those who spent most of his time creating the theory of trade. He is the author of indicators such as Money Flow and A / D (Accumulation and Distribution). But it was the study of market volatility that brought him the most popularity. Chaikin’s volatility index is another option to study the rate of price change in the market for exact points of opening a trade. It measures the difference between the maximum and minimum price at a fixed time interval. It refers to auxiliary (confirmatory) indicators, MA, EMA (one or several), MACD can be used as the main tools.
How to work with the Chaikin Volatility Index
The indicator is calculated using a relatively simple formula: the spread is first determined (the difference between the MAX and MIN value of the current candlestick). The indicator, which is obtained as a result, is smoothed with the help of the EMA with a fixed time period. Volatility = (EMA1 – EMA2) / EMA2 * 100%, where:
- ЕМА1 – sliding with price difference on the current candle;
- ЕМА2 – sliding with a difference in prices on a candle several periods ago (set in the settings).
Visually on the chart, we see how the price has changed over the time period. The formula of the indicator Chaikin partly resembles ATR, because it is less common in strategies. However, there are no ideal indicators, and each has its own preferences.
- TYpeSmooth. Sliding type: the indicator can use both MA and ЕМА. By default, the second option is taken, but in which case MA is better, in which EMA, it is impossible to say. Determined by experience.
- ROCPeriod. The number of the period of the previous time period with which the current price will be compared. In the basic version of the tool – 10.
- SmoothPeriod. The moving period, which defaults to 10.
There is a lack of Chaikin’s volatility indicator (which is why ATR is used more often) – it does not take into account gaps, gaps in opening and closing prices due to a fundamental factor. And if in intraday trading this is not important, then on long timeframes (a gap is usually formed when opening a new session), a gap distorts the indicator data.
The interpretation of the Chaikin indicator is as follows: if its readings increase dramatically on a short timeframe (that is, the volatility increases), then this indicates a high probability that the price will reach a local maximum or minimum. When the indicator reaches the extreme values, a reversal is planned (price correction or a complete change in the direction of the trend). The absence of significant changes in the indicator readings indicates the presence of a flat.
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