Similar to other indicators researched by Marc Chaikin, the Volatility indicator
is easy to calculate using a formula. It is done like so:
CHV i – the Chaikin Volatility indicator;
EMA period – exponential moving average period (the number of bars of data,
including the current value);
High i – the highest price value on the given time period;
Low i – the lowest security price on the given time period;
roc Period – the rate of change period (the number of bars of data to include
in the percent change, not including the current value); and it’s multiplied
by 100 to make the graph design easier.
First of all, a calculation of the EMA is made; the exponential price change (the
difference between the highest and lowest price for each period), generally on a
10 day extent:
EMA period (High i – Low i)
Next, calculate the percentage change in the moving average over a further period
with the given formula.
The 10 day time period is called a volatility smoothing period.
As the Chaikin Volatility indicator measures the instability of the stock market,
its high values indicates that prices are changing fast and a lot during the day.
Prices are constant when the indicator has low values. Basically, the flatter the
CVI line on a graph, the more constant and secure the prices are.
A graphed market time period may have level prices or trendy prices. When a market
is choppy, prices are variable and the market is insecure and contrarily, a trendy
market tends to have an explosion/implosion of prices, following a trend –
going up, or down. Both trendy and choppy markets can have high or low volatility
on a certain time period, hence the 10 day generally used interval. This way, traders
can better observe the true volatility of the market.
Sometimes, elevated volatility values are used in forecasting a trend reversal,
such as a turning point in the market. Volatility peaks and abysses determine market
tops and bottoms, points after which a new trend begins, be it upwards or downwards.
Consequently, inferior volatility levels may be used to reflect the beginning of
an upward price trend, which usually happens after a market consolidation period.
Although some traders believe that markets movements are random, there are several
mathematical rules that apply. Stockbroker Marc Chaikin has used simple mathematics
to find financial indicators that are helpful in forecasting market trends. With
the Chaikin Volatility Indicator, traders everywhere may input data in a facile
formula to calculate and estimate when markets reach tops and bottoms. The CVI is
calculated by the recurrence of price movements (high vs. low) on a time period.
As the indicator rises, so does the market volatility (can be triggered by massive
security sales) which in turn triggers a chain reaction followed by a bear market,
that in the end leads to a market bottom; as the CVI decreases and its line flattens,
the market loses volatility and becomes more secure, ergo prices begin to increase,
which consequently create a bull market, that usually leads to a market top.