Understanding The Chaikin Indicator
29 Jan 2022
The Chaikin Indicator is an oscillator (CO), which shows changes in a cryptocurrency's underlying momentum.
Below, we can see an example of the CO being used alongside BTC.
The CO works by measuring the momentum of the Accumulation Distribution Line (ADL), using the MACD formula. The ADL is a volume-centered indicator, showing the flow of money in and out of a cryptocurrency, calculated with the MFM (Money Flow Multiplier). After the MFM and necessary ADL calculations, the CO is then calculated through the following formula.
CO = (3-day EMA of ADL) - (10-day EMA of ADL).
The CO build-up
The CO consists of two main parts, the baseline, and the CO line.
The CO is calculated through the formula mentioned earlier, while the baseline is always at the value +-0.
With the CO, the indicator is split into two zones by the baseline. These two parts are the accumulation and the distribution zones, as shown below.
When the CO is above the baseline with a positive figure (e.g. +20K), the indicator is showing that the cryptocurrency in question is currently being accumulated. For example below we can see that ETH was heavily accumulated between 24/12/2020 and 04/01/2021, as shown with the CO spike.
Below we can see ETH falling from the accumulation zone into the distribution zone. During the fall, the CO fell from +48K to -34.5K, an overall loss of 82.5K on the indicator. The move from the accumulation zone into the distribution zone displayed that there was more interest in selling than buying ETH during this period. This conclusion is validated by ETH losing 36.14% of its value during this period.
Bullish CO crossovers occur when the CO line moves above the baseline after a period below the baseline. During the bearish period before the bullish crossover, the OC line will likely attempt to break above the baseline however fail. In the example below we can see a bullish crossover occur. The CO line attempted to break above the baseline, however failed. After two failed attempts the CO line successfully broke above the baseline with a significant move above the baseline. From here ETH then was set into an accumulation stage and rose from $141 USD to $285 USD.
Bearish crossovers occur when the CO line falls below the baseline. Once this occurs there will often be a retest of the center baseline. From here the price of the cryptocurrency is then expected to fall. An example of this can be seen below with ETH. At the purple hit marker, the CO turned bearish, crossing below the baseline. A retest of the center line subsequently followed as marked with the purple down arrow. From here ETH then lost significant value, falling 64%. ETH then turned bullish at the green hit marker, pulling itself out of the distribution zone into the accumulation zone.
Conclusion of the CO
In conclusion, the CO indicator is great at showing the momentum of a cryptocurrency. It can help produce buy and sell signals through the use of the bullish and bearish crossovers while showing the general market sentiment of a cryptocurrency. All in all, a great indicator, although like all indicators it should be used alongside other indicators for increased effectiveness.
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