Portfolio Boss Documentation

Chaikin Oscillator Filter

 

 

The Chaikin Oscillator is a form of momentum indicator that's (mostly) used without the overbought/oversold interpretations, unlike its siblings the RSI, ROC, CMO, and the like. It's one of the rare technical indicators out there that scrutinize the traded volume of an instrument. The Chaikin Oscillator was developed by Marc Chaikin as a further refinement of the Accumulation/Distribution line.

So back in the day, apparently the 1970s, the newspapers stopped publishing the market's opening prices necessary to calculate Larry William's oscillator based on Accumulation/Distribution line. Yes, traders back then actually collected newspaper clippings to backtest their strategies, a far cry from what we have now with Portfolio Boss and its Artificial Intelligence. So Chaikin devised an ingenious way of simply subtracting the 10-day EMA from the 3-day EMA, of the Accumulation/Distribution line, to create the Chaikin Oscillator.

 

 

The main premise behind Accumulation/Distribution is that a price move is significant if accompanied by an equally significant volume. When the line goes up, the shares are being accumulated (concentrated) to fewer and fewer hands, hence most of the volume is associated with the increase in price. When the line goes down, shares are distributed and most volume is associated with the price depreciation. So if an instrument closes near the high of the day, there's accumulation; and if it closes near the low, there's distribution.

Calculating the Accumulation/Distribution is pretty simple:

 

 

The resulting value is then subtracted (if today's a red candle) or added (if green candle) from the previous Accumulation/Distribution value. The Chaikin Oscillator is calculated from the EMAs of this line.

There are several interpretations when using the Chaikin Oscillator, but the most important is to look at a divergence between price action and the Chaikin indicator: when the price goes up in a given period while Chaikin indicator goes down, it's usually bearish. And when price goes down while the indicator goes up, it's bullish. This is especially true if the instrument closes above the overbought (bearish) or below the oversold (bullish) of an accompanying RSI filter. An additional confirmation could be given, for example, if the instrument closes above (bullish) or below (bearish) its 90-day Moving Average.

 

 

Then there's another interpretation that sees whether the indicator crosses above (bullish) or below (bearish) its equilibrium value (0). But as usual, these are just the general wisdom; your application of the filter could be vastly different, depending on your strategy's portfolio, rules, and other filters.

 


 

1.  Short Period: This parameter defines the Short EMA period applied to the Accumulation/Distribution line.

 

 

The norm is to use a 3-day period here. But our tests showed a longer period of 60 to 165 days may give better results.

 


 

2.  Long Period: This defines the Long EMA period for the Accumulation/Distribution line.

 

 

So the Long EMA value subtracted from the Short EMA value yields the Chaikin Oscillator. Keep in mind, this Long EMA period does not necessarily be longer than the Short EMA's period. Our tests showed a value from 35 to 85 days here would be good, or something even greater around 200 days. But the norm is a 10-day period.

 


 

3.  Mode: This parameter defines the method (interpretation) in using the Chaikin Oscillator. This should be the first parameter you set when using the filter.

 

 

There are three modes listed here:

  • Price Divergence – Price Up and Chaikin Oscillator Down
  • Price Divergence – Price Down and Chaikin Oscillator Up
  • Crossing Zero Line

So essentially there are two methods to use the Chaikin Oscillator in PB: divergence, and, crossing the zero line. These methods have their own parameters, so we'll discuss each method in the following sections.

 


 

4.  Mode – Price Divergence: This mode identifies divergence between price and the Chaikin Oscillator. You may choose between positive or negative divergence.

 

 

Generally, positive divergence (bullish) is taken when the price goes down while the Chaikin indicator goes up in a given period; this indicates that falling prices are about to go upward. Negative divergence (bearish) is when price goes up and Chaikin goes down in a given period; this indicates the rising prices will go down.

As you see in the orange box above, there's only one parameter specific to this divergence mode, that is, “Divergence Period”. It defines the time-frame in which the divergence must happen. We recommend setting a longer period here, from 70 to 110 days.

 

 

So let's say we set the period to ten days: the closing price today is $15 while ten days ago it was $20, which means the price goes down. If the Chaikin Oscillator today is at 2 million while ten days ago it was -1 million (the Chaikin goes up), then we have a divergence with the price. It's as simple as that, no need to account for higher highs and lower highs between them (though it's inherently possible if you set “Divergence Period” at a greater value).

Our tests yielded a contrarian interpretation from the norm: Buy when price goes up while Chaikin goes down, and sell when price goes down while Chaikin up.

 

 


 

5.  Mode – Crossing Zero Line: This mode simply sees whether the Chaikin Oscillator crosses above or below the equilibrium value (0).

 

 

There's one parameter (orange box above) specific to this mode, which defines whether the Chaikin Oscillator must “rise above” or “fall below” the value of zero before the instrument shall be bought/sold.

The idea for equilibrium is this: When prices consistently close near their high of the day while volume is increasing in a given period, there is significant accumulation underway (bullish), thus Chaikin Oscillator is positive (above zero). The reverse is true, i.e. when Chaikin Oscillator is below zero, there's distribution underway because prices close near their low of the day with increasing volume (bearish).

 

 

The Chaikin Oscillator in Portfolio Boss identifies the crossing literally and immediately before a signal is given. So if the oscillator is above zero today, then it must be below zero yesterday, before a signal is given to trade at tomorrow's market open. Generally, it's good to buy when the oscillator “Rises Above” the zero line, and sell when it “Falls Below” it:

 

 


 

Notes:

 

  • You can apply this filter multiple times, especially as a Buy Filter, to combine both modes (divergence and zero-crossing), for a more restrictive buy criteria.
  • Once this filter is applied (and the strategy backtested), you can see the Chaikin Oscillator line plotted below the price chart (at the Instrument Tab).

 

 

 

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