Chaikin's Volatility indicator compares the spread between a
security's high and low prices. It quantifies volatility as a widening of the range
between the high and the low price.
There are two ways to interpret this measure of
volatility. One method assumes that market tops are generally accompanied by increased
volatility (as investors get nervous and indecisive) and that the latter stages of a
market bottom are generally accompanied by decreased volatility (as investors get bored).
Another method (Mr. Chaikin's) assumes that an increase
in the Volatility indicator over a relatively short time period indicates that a bottom is
near (e.g., a panic sell-off) and that a decrease in volatility over a longer time period
indicates an approaching top (e.g., a mature bull market).
As with almost all experienced investors, Mr. Chaikin
recommends that you do not rely on any one indicator. He suggests using a moving average
penetration or trading band system to confirm this (or any) indicator.
The following chart shows a Chaikin's Volatility
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.
Next, calculate the percent that this moving average has
changed over a specified time period. Chaikin again recommends 10 days.