In the last post we introduced the Chaikin oscillator. As a reminder, this is an indicator that measures the momentum of the A / D line and can therefore provide information as to whether the trading volume is accelerating in growth or the trend could soon come to a standstill. This makes the Chaikin oscillator a highly optimized approach, since it not only analyzes the pure price trend, but also the behavior of the volume in comparison to the price.
In our analysis, we found that the A / D Line alone is a good indicator, for example, to identify a turnaround. The Chaikin oscillator even had a lead in front of the A / D line in many cases and could therefore indicate a reversal even earlier. At the same time, however, it meant that in some cases it would deliver signals too early.
So the question for us is: how to build a strategy with the Chaikin oscillator to prevent the early signals?
Trading strategy with the Chaikin oscillator
Rule number 1, which we set ourselves, is the trading of possible trend reversals. Since divergences are considered the most reliable set-ups in technical analysis, we will use them as well. According to the interpretation of the Chaikin oscillator, we can assume that a trend reversal is in prospect if the oscillator itself takes the opposite direction of the price of the traded underlying.
The second rule also applies to the indicator. This must have fallen below or exceeded the zero line. This is also a signal that, as we saw in the last post, is not always reliable and can come too early. The lower chart makes this fact clear once again. The circled area shows that the oscillator was not only rising, but was also above the zero line before it went down and the trend reversal took place.
We work around this problem by changing the indicator settings change. As a reminder, the oscillator is calculated by placing two moving averages on the A / D line, one faster and one slower. Both are then subtracted from each other and thus result in an oscillator, which, similar to the MACD indicator, measures the trend strength of the A / D line. The standard settings for the two averages are 3 and 10. We increase these settings to 5 and 25 and look again at the chart. In this case, the signal comes a little later - after the dynamic sell-off has taken place.
Rule No. 3 relates to the set-up itself. We identify relevant resistances and supports that should be broken, to get another signal. There are no limits to the preferences of traders. Either trend lines or horizontal lines can be used well. We also need a bottom or top formation in the form of a higher low or lower high.
The entry is made when the horizontal line breaks, if the other rules can be observed. A stop loss, if you are not trading binary options, can then be placed slightly below or above the defined breakout level. Choose the duration between 1-3 days and the strategy is ready. The rules summarized again:
- The 4-hour chart is traded.
- The Chaikin oscillator must develop a divergence to the price and have exceeded or fallen below the zero line (settings 5/25).
- The price is a top or bottom with a higher low or lower high.
- The price breaks out of a relevant price resistance or support.
- Duration 1-3 days.
Conclusion - The Chaikin oscillator is suitable as the only indicator
Many indicators have clear weaknesses that need to be optimized with the help of other indicators. Since the Chaikin oscillator is already highly optimized, setting changes are often sufficient to provide a basis for a trading system. In conjunction with a set-up analysis, systems can be developed that allow a short to medium-term investment horizon.
Because the indicator includes the A / D line in the calculation and the A / D Line in turn compares trading volume to price behavior, the indicator is a further development of the popular on-balance volume indicator and is one of the few that combine three factors - price, volume and time - while many other technical indicators only allow the price and the time or period to be included in the calculation.
Such strategies can be implemented with the broker Binary.com.