A Center Line Oscillator Moves in Opposition to Price
Most Technical and Retail Traders are familiar with high and low range oscillators or what is often called an Overbought or Oversold Oscillator. However few really understand or use a Center Line Oscillator which is extremely useful during volatile market conditions, when giant to large lot Market Participant Groups are trading the opposite side of the market from smaller lot Market Participant Groups which is what creates volatility most of the time.
Understanding the relationship between the larger lot institutional activity and the small lot activity of the retail crowd, helps guide traders towards trading with the larger lots rather than against them. This reduces whipsaw losses, weaker trades, and frustration.
At all times Technical and Retail Traders should know which Market Participant Groups are in control of price, as this information relates to how price will behave in the near term for Intraday, Day, Swing, and Position Trading.
The Chaikin Oscillator ChiOsc is a Center Line Oscillator, and has the ability to move in opposition to price. This is one of the key benefits of any oscillator that uses a center line. When using these oscillators Technical Analysts are not looking at Overbought versus Oversold conditions of price on the Short-Term or Daily Trend.
The use of a center line in an oscillator indicator is to determine and reveal whether the power behind the price action is on the buy side or sell side. This creates a negative divergence, whenever the giant to larger lot Market Participant Groups are trading the opposite side of a trade from the Retail or Smaller Lot Traders.
The stock chart example below is an excellent example of how this indicator can warn early that giant to larger lots are selling down.
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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