A trading strategy based on Chaikin oscillator is a simple set of rules aimed to help traders to improve the overall profitability, indicate market conditions when the previous trend is getting exhausted and provide signals to start and stop trading cycles. The trading method is flexible in terms of different types of market activity as it takes into account the trading volume within the given period and another important parameter driving asset prices - money flow.
What is the Chaikin oscillator?
Chaikin oscillator is a technical indicator based on additional analysis of the widely-used momentum and trend indicator - MACD. The main idea of measuring the accumulation and distribution of MACD was firstly introduced by a technical analyst and trader Marc Chaikin. He noticed that the moving average of convergence-divergence can deliver even more information to an analyst than the close price itself. As a result of Chaikin mathematical iterations, a new indicator was born. Chaikin oscillator is different from the vast majority of standard oscillators as it does not have a fixed range of its value. It is closer to Commodity Channel Index - an indicator reflecting relations between bullish and bearish momentum, as well as trading activity within a given period.
What does the Chaikin oscillator tell you?
Chaikin oscillator reflects the trend’s direction and measures the strength of the price action. Accumulation increases in case of buyer’s dominance in the market as the asset price breakthrough recent highs consequently, creating a bullish momentum. Distribution influences the negative change of the asset price as the sellers push it through lower lows, adding power to the bearish momentum. The ratio between these two parameters allows Chaikin’s volatility to reflect the trend’s strength and indicate the direction. As far as the technical analysis in general and oscillators, in particular, suggest that every factor needed for a trend to occur is already included in the current asset price, the prediction based on additional smoothing of the accumulation-distribution line allows traders to follow strong trends and spot market reversals. Balance between accumulation and distribution is the key parameter driving the market, according to Chaikin. This balance is reflected in the indicator’s value, showing binary options traders attractive entry levels before a strong price action starts, as well as pointing to moments when it is better exiting the trading cycle.
How to use the Chaikin oscillator in Binary Options?
The mathematical formula of Chaikin oscillator is similar to MACD calculations but the lag is much lower thanks to using the accumulation-distribution line instead of close prices. As a result, Chaikin analytics review allows reacting on a minimal change of the momentum faster, which leads to more profitable entries to the market.
When indicators value is above zero, this period is called accumulation, meaning that call-option buyers dominate the market, pushing the underlying asset price higher. The best efficiency of a trading cycle is reached when Chaikin oscillators line is crossing zero from below and/or keeps edging higher, increasing the positive accumulation. But when it’s reversing the direction, coming out of a local peak, then the likelihood of consolidation or retracement is getting higher, so binary options traders should stop the trading cycle of buying call options.
Distribution occurs when Chaikin oscillator curve is placed below zero, indicating the dominance of put options on the market, which leads to the descending action of the underlying asset price. Thus, it is recommended to buy put options when the indicators value is increasing the negative distance from zero. If the oscillator reached a local bottom and started edging higher, then binary options traders should stop the trading cycle of buying put options, waiting for the correction to finish. A rebound from zero lines is considered as an additional trading signal to restart buying put options.
The screenshot below shows several examples:
Chaikin oscillator vs MACD
The previous paragraph suggests that Chaikin oscillator is faster than MACD in terms of trading signals. This is why it is important to compare the performance of both indicators. The screenshot below shows them in action.
Two red arrows in the indicators windows show the difference in the reaction of technical instruments on the change of momentum, which led to the beginning of sharp price action. First, the red arrow highlights a moment when Chaikin oscillator peaked and reversed the direction of the accumulation line, decreasing the buying pressure. Although the price action was mixed after that, Chaikin oscillator was declining towards zero, while MACD lines kept edging higher, performing the bearish crossover only 9 bars after the initial signal from Chaikin oscillator. Therefore, instead of buying call options, a trader could have stopped the cycle, obtaining the wait-and-see position until a clear signal occurred. When Chaikin oscillator dropped below zero and the bearish crossover of the MACD line confirmed the signal, the cycle of buying put options started.
Another example is related to a bullish signal to start buying call options. It also came in much earlier from the Chaikin oscillator then from MACD lines. Therefore, binary options traders can get ready to start a new cycle before it happens thanks to the combination of two indicators. Another powerful advantage is that binary options traders can exit cycles in time, keeping the high level of profitability.
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Assets and timeframes to trade with Chaikin oscillator
As far as the indicator has the trading volume as an important calculation parameter of its formula, binary options traders should focus on assets with the highest liquidity level. There are some exotic currency pairs, for example, that do not provide the trading volume amid low liquidity, so traders should avoid them. When it comes to timeframes and expirations, Chaikin oscillator is extremely flexible and able to react to any change in the trend’s momentum, even the minimal one. This makes the indicator a powerful tool to trade on ultra-short timeframes such as 5- or 1-minute charts. Traders should choose the timeframe according to their individual trading strategies and money management rules.
Examples of profitable trades using
The USD/CHF four-hourly chart below shows four technical signs delivered to a binary options trader by Chaikin oscillator:
- The indicator peaked, signalling a possible retracement or consolidation at least. Aggressive traders could have started buying put options for USD/CHF at that point;
- The indicators value dropped below zero, signalling a moment when accumulation came to an end and the distribution period started. That was a powerful signal to start or proceed with buying put options for the pair;
- Chaikin oscillator bottomed out and started heading north, which was the signal to halt the trading cycle and wait for the correction to finish;
- Another bearish reversal allowed traders to renew the trading cycle of buying put options.
Chaikin oscillator has a powerful formula of smoothing accumulation-distribution line of the MACD indicator and averaging it to reach the most efficient result. Indicator shows the trends direction, points to its strength and highlights possible reversal points when the previous price action is getting exhausted and consolidation or retracement is likely. Chaikins volatility is different from the vast majority of oscillators as it does not have a fixed range, which helps the indicator to be more sensitive to any change of the momentum. The trading strategy based on Chaikin oscillator is flexible and reliable as it works well with any underlying asset class on any timeframe. Nevertheless, binary options traders might consider using the indicator in different combinations with other technical tools and instruments to maximize profitability.