Chaikin's Volatility

[Go Back]

Description

The Volatility indicator compares the spread between a security's high and low prices. This is done by first calculating a moving average of the difference between the daily high and low prices and then calculating the percent rate-of-change of that moving average.

Before calculating the Volatility indicator, you are asked to enter the number of periods in the moving average and the number of periods in the R.O.C. The author of this indicator (Marc Chaikin) recommends 10 periods for both the moving average and the R.O.C.

Interpretation

This indicator quantifies volatility as a widening of the range between the highs and the lows (i.e., wider price swings during the day).

There are two ways to interpret this measure of volatility. One method assumes that market tops are generally accompanied by increased volatility and that market bottoms are generally accompanied by decreased volatility. An opposing method (Mr. Chaikin's) assumes that an increase in the Volatility indicator over a short period indicates that a bottom is near (e.g., a panic sell-off) and that a decrease in volatility over a longer period indicates an approaching top (e.g., a mature bull market).

TIP: Mr. Chaikin recommends that investors do not rely on any one indicator and suggests using a moving average penetration or trading band system to confirm this (or any) indicator.

Because this indicator uses high and low prices in its calculation, it will not work on securities that only have a closing price (e.g., most mutual funds).