Developed by Marc Chaikin, the Chaikin's Volatility indicator quantifies volatility as the widening of the range between high and low prices by comparing the spread between the instrument's high and low prices over n-periods. Chaikin's Volatility indicator is created by first calculating an exponential moving average of the difference between the High and Low price for each period over n-periods (typically 10 periods) and then by calculating the percentage change in the exponential moving average over n-periods (also typically 10 periods).
There are two basic methods to interpret Chaikin's measure of volatility.
Method 1: Assume that market tops are generally accompanied by increased volatility while the late stages of market bottoms are generally accompanied by decreased volatility.
Method 2: Assume that a shorter term increase in the Volatility indicator indicates an approaching market bottom while a longer term decrease in the volatility indicator indicates an approaching market top.
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