Last Updated on October 16, 2021 by Oddmund Groette
The Chaikin Oscillator 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 see much benefits 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 trading strategies we tested.
What is the Chaikin Oscillator?
The Chaikin Oscillator measures the accumulation or distribution and is not 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 crossing the averages:
The first test we did was this:
Buy when the 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 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:
When the Chaikin Oscillator is overbought and oversold:
What happens when the Chaikin Oscillator has risen during a short period of time? Let’s make a test when the indicator has 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 criteria 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 max drawdown is 18% (on the S&P 500).
Combining the Chaikin Oscillator and the RSI:
Let’s test a third variant:
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%.
We didn’t find much value in the Chaikin Oscillator, 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:
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinions – they are not suggestions to buy or sell any securities.