Chaikin’s volatility indicator measures the market volatility based on the trading range between high and low prices for a given period. The indicator was developed by Marc Chaikin and hence the name. Chaikin’s volatility indicator values are derived by calculating the exponential moving average (EMA) of the difference between high and low for a period and then calculating the percentage change in moving average over a period.
Chaikin’s = {(HL Avg – HL Avg N) / HL Avg N} * 100
When HL Avg is the high-low range for a given day and N denotes the same value ‘n’ periods ago. Usually both the EMA period and ROC period (n) are 10 days, but traders can use custom values to increase or decrease sensitivity.
In general, high values of Chaikin’s volatility indicator indicate increased market volatility and low values indicate low volatility. There are two basic methods to interpret Chaikin’s graphs.
- Assume that market tops are accompanied by increased volatility and market bottoms are accompanied by decreased volatility.
- Assume that increase in indicator over a shorter time period indicates near-future market bottom and decrease in indicator over a longer period indicates near-future market top.
Unlike Average True Range (ATR) indicator, Chaikin’s volatility does not take trading gaps into account. The indicator offers better results when used together with other indicators like moving averages and price envelops.
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