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Chaikin Volatility

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The Chaikin Volatility Indicator is the difference between two moving averages of a volume weighted accumulation-distribution line. By comparing the spread between a security's high and low prices, it quantifies volatility as a widening of the range between the high and the low price.

One interpretation of these calculations assumes that market tops are frequently accompanied by increased volatility (as investors get nervous and become indecisive) and latter stages of a market bottom are generally accompanied by decreased volatility. Chaikin has written that an increase in the Volatility Indicator over a relatively short time period indicates that a bottom is near and that a decrease in volatility over a longer time period indicates an approaching top.

Marc Chaikin measures volatility as the trading range between high and low for each period. This does not take trading gaps into account as Average True Range does.

Chaikin Volatility should be used in conjunction with a moving average system or price envelopes.

Trading Signals

Look for sharp increases in volatility prior to market tops and bottoms, followed by low volatility as the market loses interest.

  1. A Chaikin Volatility peak occurs as the market retreats from a new high and enters a trading range.

  2. The market ranges in a narrow band - note the low volatility.

  3. The breakout from the range is not accompanied by a significant rise in volatility.
  4. Volatility starts to rise as price rises above the recent high.

  5. A sharp rise in volatility occurs prior to a new market peak.

  6. The sharp decline in volatility signals that the market has lost impetus and a reversal is likely.
Computation

To calculate Chaikin Volatility:

First, calculate an exponential moving average (normally 10 days) of the difference between High and Low for each period::

EMA [H-L]

Next, calculate the percentage change in the moving average over a further period (normally 10 days):

( EMA [H-L] - EMA [H-L 10 days ago] ) / EMA [H-L 10 days ago] * 100

Parameters

  • Period 1 (10): The number of bars in the High-Low period.
  • Period 2 (10) : The period to compute the volatility smoothing.

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