Chaikin Oscillator represents differential of moving averages of Accumulation /Distribution indicator.
There are three main propositions underlying concept of Chaikin Oscillator.
The first rule
If currency closes above its average value for the day (High+Low/2), it says that accumulation took place on that day. If currency closes below its average value for the day, it says that distribution took place. If currency closes nearer to Low point, distribution is more intense.
The second rule
A strong accumulation of trading volume is accompanied by a steady growth of price. The volume performs as certain kind of fuel feeding growth of market, whereas small volumes accompanying growth of price say about shortage of fuel for market growth.
Decline of price is as often as not comes amid low volume and lead to close of position by institutional investors. In the beginning volume grows, upon decline of volume price falls down and when market reaches bottom, accumulation takes place.
The third rule
Chaikin Oscillator allows to see volume of money in the market. By comparing money volume and price, we can find out the top and bottom of market: not only short-term, but long-term levels as well.
Chaikin Oscillator is recommended to be applied along with other indicators of technical analysis in order to have confirmation of signal, cause there are no irrefutable methods. This way we will increase accuracy of analysis.
One of crucial and prior signals for this indicator is reaching of new Highs and Lows by price (especially upon reaching overbought/oversold). Oscillator does not manage to overcome previous values and reversal takes place.
- Reliable signals are the signals in direction of middle-term tendency.
- If oscillator confirms the signal, it still does not mean that price will move in the appropriate direction.
Also there is another method for application of C.O., at which signal is matching with price direction. For instance, if currency is on the ascent, and prices are above 90-days' moving value, then upward movement of oscillator in the zone of negative value serves as signal for purchase (but only in the case if price is above 90-days' moving value.