Chaikin Oscillator Trading Strategy – Does It Work? (Backtest of the Chaikin Indicator)
Last Updated on October 23, 2022
The Chaikin Oscillator Indicator was developed by Marc Chaikin in the 1980s. It’s not widely used nor well-known, perhaps for good reasons: we didn’t manage to find any significant profitable Chaikin Oscillator Trading Strategy in any of the quantified tests we did.
In this article, we briefly explain what the indicator is, how it’s calculated, and if it can serve any purpose in your trading. Unfortunately, we found the indicator not useful in the ten Chaikin strategies we tested.
What is the Chaikin Oscillator Indicator?
The Chaikin Oscillator Indicator measures the accumulation or distribution and is not to be confused with the Chaikin Money Flow Indicator. The aim of the indicator is to measure the momentum of the stock’s moves, and the indicator oscillates around zero (up and down).
The indicator is calculated in four steps and is somewhat “complicated”:
- Money flow multiplier: ( (Close-Low)-(High-Low) ) / (high-Low)
- Money flow volume: Money flow multiplier * volume
- Accumulation/distribution line (ADL): previous ADL + current period’s money flow volume
- Chaikin oscillator: (x-day MA of ADL) – (x-day MA of ADL)
In Amibroker the code is like this:
MFM = ( (Close – Low) – (High – Low) ) / (high – Low) ;
MFV = MFM*Volume;
ADL = MFV + Ref(MFV,-1);
CO = EMA(ADL,3) – EMA(ADL,10);
How does the Chaikin Oscillator work?
The formula above indicates the Chaikin Oscillator oscillates around zero. The short EMA shows the short-term momentum, while the long EMA shows a longer-term momentum. Below is an example of the indicator for silver miners (SIL) using the “standard” moving average values of 3 and 10:
Does the Chaikin Oscillator have any predictive value? Below we do some quantified tests:
When the Chaikin Oscillator crosses the averages:
The first Chaikin trading strategy we tested was this:
Buy when the Chaikin oscillator indicator crosses above zero, and sell when the indicator crosses under zero.
On the S&P 500, an optimized test shows that the best values are ten and 20 days. However, the CAGR over the last twenty years is an abysmal 2.4%.
What happens if we flip the criteria?
Buy when the Chaikin oscillator indicator crosses below zero, and sell when the indicator crosses above zero:
Because the S&P 500 is highly mean-reverting, this improves the result. We got the best result by using a short-term average of around 10 days and a long-term average of about 50 days. Using those settings, we got this equity curve:
The number of trades is 287, the average per trade is 0.54, the profit factor is 1.76, and the max drawdown is 37%.
When the Chaikin oscillator indicator is overbought and oversold:
What happens when the Chaikin oscillator indicator has risen during a short period of time? Let’s make a Chaikin strategy based on high RSI readings:
We use the RSI, but not on the price of the ETF, but on the Chaikin Oscillator in the code above. The number of days for the moving average is 3 and 10 days. The buy criterium is when the indicator has a reading below 5 for the two-day RSI, and we sell when the close is higher than yesterday’s high.
The result is 216 trades with an average of 0.3% per trade. The profit factor is 1.6 and the max drawdown is 18% (on the S&P 500).
Combining the Chaikin oscillator indicator and the RSI:
Let’s test a third Chaikin trading strategy:
Chaikin oscillator vs RSI: The two-day RSI of the stock must be below 20, but at the same time, the Chaikin Oscillator must be above zero. We sell when the close is higher than yesterday’s high. The equity curve looks like this on the S&P 500:
There are 216 trades with an average of 0.3% per trade, the profit factor is 1.6, and the max drawdown is 17%.
Ending remarks about the Chaikin indicator
We didn’t find much value in any of the Chaikin Oscillator trading strategies we tested, but that doesn’t mean it’s useless. It might work by using some other criteria we are not aware of.
We have published similar tests of other indicators. Please check out our landing page for Trading Strategies: