CHO (Chaikin Oscillator)

CHO (Chaikin Oscillator) is a volume oscillator that was developed by Mark Chaikin in 1970's. Besides CHO, Chaikin developed AD (Accumulation/Distribution) and CMF (Chaikin Money Flow) oscillators that are listed among the standard indicators of Marketscope.

CHO is intended to help detecting the market price trend's direction and strength. It is also capable to forewarn of possible trend reversals.
For these purposes, CHO measures the buying (accumulation) or selling (distribution) pressure on an instrument and presents the results as a line. The oscillator's values are obtained by, first, calculating the AD oscillator's values, then, applying of fast and slow smoothening techniques to the AD oscillator's values, and, finally, determining the difference between the fast and slow moving averages of the AD oscillator's values. (The mathematical formulas are provided later in the article). A running total of the CHO values forms a line (or a histogram as a trader's choice can be). The line fluctuates above and below the zero line. When the CHO values are above the zero line, the buying (accumulation) pressure prevails over the selling (distribution) pressure forming an uptrend and vice versa. The further away from the zero line the oscillator's values are, the stronger the respective trend is.

As a rule, the direction of the oscillator's line coincides with the direction of the market price trend, but sometimes the oscillator's line diverges from the market price trend's direction, thus, forewarning of possible trend reversals.

Please note that CHO is always drawn in an additional area below the market price chart.

CHO works best when a strong market price trend is present. Though its ability of confirming a buying or selling pressure on an instrument's price trend is important, CHO is generally not used as a stand-alone indicator. Mark Chaikin suggested using the oscillator in conjunction with other indicators such as price envelope around a 21-day moving average and an overbought/oversold oscillator, such as RSI, that either confirm the CHO trading signals or decline them.

Please remember that as its Data Source the oscillator uses the data of another indicator (in our case, it is AD) that, in its turn, uses the historical data. Thus, all the information CHO provides belongs to the past. A trader can only suppose that the past tendencies will continue to develop in the same way for some time in the future and try to use the information appropriately.

To apply a CHO oscillator to a chart, a trader needs to follow the procedure common to all Marketscope indicators. For more information, see the Add Indicator article.

During the procedure, a trader can customize an oscillator by specifying its parameters in the Properties dialog box. For more information, see the Change Indicator Properties article.

Calculation - the parameters needed to calculate an indicator's prices.

Style and Appearance - the parameters needed to specify the way an indicator appears on a chart.

In addition to the traditional Line color, Line width, and Line style parameters, the Style list includes three more entries:

Display mode - the parameter allows specifying the way the oscillator is to be drawn on the chart (either as a line or histogram). The possible values are Line and Histogram. The default value is Line.

Up histogram color - the parameter allows to specify the color of the histogram's bars that are above the zero line.

Down histogram color - the parameter allows to specify the color of the histogram's bars that are below the zero line.

On the following picture, you can see examples of the CHO oscillator drawn as a line and histogram.

The parameters are available on the Parameters tab of the CHO Properties dialog box under the Style heading.

Fast MA periods - the parameter allows to specify the number of periods, over which the Fast MA indicator (used in the calculation of CHO) is to be calculated. The possible parameter's values are from 1 through 1,000. The default value is 3. The smaller the number is, the more sensitive to the market changes the CHO oscillator is and vice versa. The most popular is the default value - 3.

Slow MA periods - the parameter allows to specify the number of periods, over which the Slow MA indicator (used in the calculation of CHO) is to be calculated. The possible parameter's values are from 1 through 1,000. The default value is 10. The smaller the number is, the more sensitive to the market changes the CHO oscillator is and vice versa. The most popular is the default value - 10.

Smoothing method - the parameter allows to specify the smoothing technique to be applied to the Fast MA and Slow MA indicators during the calculation of the CHO values. The possible parameter's values are MVA, EMA, LWMA, SMMA, Vidya (1995), Vidya (1992), and WMA. The default value is MVA. Traders choose the smoothing technique in accordance with their needs and preferences. The most popular is the default value - MVA.

A/D calculation mode - the parameter allows to specify the calculation mode of the AD indicators used in the calculation of the CHO values. The possible values are Classic, Classic Incremental, and Trade Station. For more information, see the AD (Accumulation/Distribution) article. The default value is Classic Incremental.

The parameters are available on the Parameters tab of the CHO Properties dialog box under the Calculation heading.

When a CHO oscillator is drawn on a chart, a trader can analyze its information and try to interpret it correctly. CHO produces two major trading signals (provided they are confirmed by other technical analysis tools):

Trend Confirmation During a strong uptrend or downtrend, moving of the CHO line or histogram bars away from the zero line in the same direction as the market price moves confirms the current trend.

Divergences Divergences occur when the market prices and the oscillator move in the opposite directions (divergence itself) or towards each other (more precisely called convergence, but in the article we'll stick to the term 'divergence' in both cases). It is a signal of a possible trend reversal. Divergences can be of two types:

Bullish divergence occurs when an instrument's prices move down, but the CHO oscillator moves flat or upwards. This shows weakening of the selling pressure on the instrument that can be treated as a warning of a bullish reversal and the need to consider closing of Sell positions and opening of Buy ones.
On the following picture, you can see an example of a bullish divergence.

Bearish divergence occurs when an instrument's prices move up, but the CHO oscillator moves flat or down. This shows weakening of the buying pressure on the instrument that can be treated as a warning of a bearish reversal and the need to consider closing of Buy positions and opening of Sell ones.
On the following picture, you can see an example of a bearish divergence.

Once a divergence takes place, a trader should look for a confirmation of an actual reversal. A divergence can be confirmed by means of different technical analysis tools such as trend-following indicators, momentum oscillators, and chart patterns.

Please note that divergences are often misleading in a strong price trend. A bullish (or bearish) divergence can occur in a strong downtrend (or uptrend) and yet the strong downtrend (or uptrend) continues.

The AD oscillator's values are calculated automatically using the following formula:

where:
CHO - is the CHO value of the period being calculated.
Fast MA - is the AD oscillator's value (the calculation mode is specified by the A/D calculation mode parameter) of the period being calculated that is smoothened by a shorter-period MA indicator of choice (the number of periods is specified by the Fast MA periods parameter and the smoothing technique is specified by the Smoothing method parameter).
Slow MA - is the AD oscillator's value (the calculation mode is specified by the A/D calculation mode parameter) of the period being calculated that is smoothened by a longer-period MA indicator of choice (the number of periods is specified by the Slow MA periods parameter and the smoothing technique is specified by the Smoothing method parameter).