What Is Chaikins Volatility Indicator & How To Trade With It

Chaikins Volatility Indicator Explained

The chaikin volatility indicator was developed by Mark Chaikin, a famous stock trader and market analyst who began his career with the work of Joe Granville and Larry Williams. Despite originally being developed for stock trading, the indicator can be used to trade forex, indices, commodities, precious metals, energies, cryptocurrencies and more. Chaikin’s volatility is one of the technical indicators with which you can give an objective assessment of the range of price fluctuation.

What is Chaikin’s volatility indicator?

The Chaikin volatility indicator shows the difference between two moving averages of a volume weighted accumulation-distribution line. By comparing the difference between a trading instruments high and low prices, it quantifies current volatility as a widening of the range between the respective high and the low prices. In other words, this can be a useful indicator for technical analysis when implemented as part of an overall forex trading strategy.

Chaikin volatility vs ATR
Chaikin volatility vs ATR

In the chart above, we compare Chaikin’s volatility with the markup of another popular indicator – the average true range (ATR). As you can see, there is a clear similarity between them, but Chaikin Volatility reacts to price fluctuations a little faster than its main competitor in this particular example. Although, it should be noted that the reaction times of both indicators can vary depending on the indicator settings that the user inputs.

How to use the Chaikin volatility indicator?

The original developer recommendations when trading with the Chaikin volatility indicator are as follows:

  • If volatility increases rapidly on a decline in quotes, the market will soon reach the bottom.
  • If volatility decreases during the asset’s bullish phase, investors may lose interest in the asset.

In principle, there is nothing to add here, since in the first case, we are dealing with the classic panic of the crowd, which can often act irrationally when the market collapses. In the second situation, quotes often grow by inertia, e.g. investors work toward the old technical trend (when the actual potential of the asset is already exhausted).

First, Chaikin volatility is often used to search for extreme conditions. When Chaikin’s volatility reaches a certain critical point, the likelihood of a trend reversal (or at least the appearance of a correction) increases prominently. The extreme level can depend on the timeframe and the currency pair being traded.

Chaikin volatility indicator - overbought & oversold
Chaikin volatility indicator – overbought & oversold

The second strategy, within the framework of which Chaikin’s volatility involves breaking down the market into different sectors, classified according to trading activity. Such an analysis is useful in the process of optimizing systems focused on Renko charts. Besides, different volatility can affect the operation of some oscillators.

And the latter approach is the simplest and most obvious – Chaikin’s volatility is often used as a correction factor in calculating stop loss and take profit. For example, if the rules of a certain system indicate that a stop loss of EURUSD is set at 20 points when transferring this method to GBPUSD, the indicator could be used to recalculate the value of the protective order using the formula: 20 * CHV (GBPUSD) / CHV (GBPUSD).

You can also use the Chaikin’s volatility indicator for finding price divergence. This can often be an indication to detect early trend reversal.

Chaikin volatility indicator - divergence
Chaikin volatility indicator – divergence

Chaikin’s volatility trading strategy

Like any other statistical indicator, Chaikin’s volatility indicator may generate many false signals. Therefore, we could implement a 100-period simple moving average (SMA) as a filter to try and trade only in the direction of the overall trend.

Chaikin’s volatility buy trade setup

  • For a valid buy setup, the 100-period SMA must be below the price.
  • We may buy an asset if the Chaikin’s indicator shows a value near the oversold area.
  • We wait for the price to stop falling and start rising gradually.
  • We could place the stop-loss slightly below the swing low.
Chaikin volatility indicator - buy trade signal
Chaikin volatility indicator – buy trade signal

Chaikin’s volatility sell trade setup

  • For a valid sell setup, the 100-period SMA must be above the price.
  • We could sell an asset if the Chaikin’s indicator shows a value near overbought area.
  • We wait for the price to stop rising and start falling gradually.
  • We could place the stop-loss slightly above the swing high.
Chaikin volatility indicator - sell trade signal
Chaikin volatility indicator – sell trade signal

Chaikin’s volatility conclusion

Chaikin’s volatility indicator is indeed a very useful trading tool that can help traders in their market analysis. It measures volatility by looking at the high and low prices in a specific time period which can be set by the user. The indicator can be used in a variety of ways, either to identify a potential change in the trend (if volatility decreases for a longer period of time) or to assess potential risk (if volatility suddenly increasess).

I would prefer to use the majority of technical indicators such as the Chaikin’s volatility indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Chaikin’s volatility indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Chaikin’s volatility indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Chaikin’s volatility indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!