Chaikin's Volatility measures price volatility by comparing the spread between a series of a security's high and low prices over a set period of time. In general, larger spreads between the high and low prices indicate higher levels of volatility.
Analysts typically interpret Chaikin's Volatility in one of two ways. One interpretation is that market tops are associated with increased volatility, and market bottoms are associated with decreased volatility. The second interpretation is that a sharp increase in volatility may indicate an approaching bottom, and a gradual decrease in volatility over time might mean that the market is reaching its peak. While interpretations of Chaikin's Volatility vary, many analysts hold the general view that changes in volatility are valuable tools for predicting possible trend reversals.
Calculating Chaikin's Volatility can be complex. However, the basic components include the security's Exponential Moving Average, which averages price data, a security's high and low prices over a given time period, and the Price Rate-of-Change, which measures how much a security's value has changed over time.
Chaikin's Volatility is calculated by first calculating an exponential moving average of the difference between the daily high and low prices. Chaikin recommends a 10-day moving average.
H - L Average = Exponential Moving Average of (High - Low)
Next, calculate the percent that this moving average has changed over a specified time period. Chaikin again recommends 10 days.
The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.