Investing & Trading

Chaikin Volatility Study

By Samantha Baltodano


TL;DR:

The Chaikin Volatility study is a technical indicator that predicts trend reversals based on changes in volatility. It is calculated as the rate of change of the average trading range and is typically used in conjunction with a moving average system or price envelopes. Traders should look for sharp increases in volatility prior to market tops and bottoms, followed by low volatility as the market loses interest.


What Is Chaikin Volatility Study?

The Chaikin Volatility study is a technical indicator used to predict trend reversals based on volatility analysis. 


This indicator interprets volatility as expansion of the range between High and Low prices. The Chaikin Volatility indicator is calculated as the rate of change of the average trading range.


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 a sharp increase in the Chaikin 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.


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. The breakout from the range is not accompanied by a significant rise in volatility.
  3. Volatility starts to rise as price rises above the recent high.
  4. A sharp rise in volatility occurs prior to a new market peak.
  5. The sharp decline in volatility signals that the market has lost impetus and a reversal is likely.


Calculation


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.


Summary

  • The Chaikin Volatility study is a technical indicator used to predict trend reversals based on changes in volatility.
  • It is calculated as the rate of change of the average trading range.
  • Traders should look for sharp increases in volatility prior to market tops and bottoms, followed by low volatility as the market loses interest.

Chaikin Volatility is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.


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