Forex Tools: Tips for Using the Chaikin Volatility Indicator

You need a new trading strategy for your forex account. The problem with a lot of them is that they tend to work for a while and then you either get bored with them or they stop working for you. It’s a good idea to try out new strategies every once in a while just to see what’s out there. And, if you’ve never tried the Chaikin Volatility Indicator, you’re in for a treat.

What Is It?

This volatility index was first developed by Marc Chaikin, and it is an attempt to depict the volatility in the market by calculating the difference between the high and low for each period. It essentially measures the difference between two moving averages of a volume-weighted accumulation distribution line. This is different from the Average Range indicator because it does not account for gaps.

This makes the strategy good for short-term traders because gaps can pop up overnight and cause peaks in volatility to be minimised, thus distorting the true nature of the volatility in the market.

How To Interpret It

Interpreting volatility measured this way is a little tricky. One method assumes that the market tops out at a certain point and it’s this point that is accompanies by an increase in volatility. Investors get nervous about peaks. But, they get bored by the bottom of a valley.

Another interpretation of this kind of volatility is that Chaikin’s formula assumes that an increase in the volatility indicator over the short-term can tell us when a bottom is forming. Likewise, a slowdown or decrease in volatility tells us about a mature bull market and the end of a rally.

When To Use It

Most online forex brokers allow you to choose between multiple trading platforms. But, within these platforms you can usually customise the software to accommodate your unique trading style. This is the beauty of this indicator. It’s not difficult to employ, and you can use it every single day to check the general volatility of the market, since it tends to appear every day at around the same time – between 14:00 and 16:00 GMT.

This is a strong signal of when to enter and exit the markets. When the Chaikin volatility index is below “0,” there’s nothing going on in the market and it’s a bad time to invest. When the volatility moves above “0,” it’s time to enter a trade, and se another moving average crossover or pivot level as a guide to how to proceed. Then, just watch as to when the volatility peaks, and you’ll know when to get out of the market.

You can even arrange these indicators altogether, creating your own trading robot (one of the types of automated forex trading systems) that will do this work for you and either produce trading signals you can follow or even open trading positions for you.

The Calculation

Knowing how to calculate the volatility is helpful. You can then set up your trading platform and watch for it, verifying it before you take a position. This volatility indicator is calculated using the following calculation:

H-L Average = Exponential moving average of (High – Low)

Next, calculate the percent that the moving average has changed over a specified time period, like 10 days:

formula

 

 

Lewis Patterson likes to look at all the Forex and trading tools out there today. As an avid blogger, he then likes to share them with his readership on various investing, financial, Forex and stock market blog sites.

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