The Aroon indicator was developed to identify trends in the market and the direction of price movement. The essence of this indicator is to identify and display changes in the market trend towards weakening or strengthening within a certain time interval.
Aroon indicator was created by the famous trader of Indian origin Tushar S. Chande, author of the famous “hybrid” tool Stochastic-RSI and many other useful tools of technical analysis.
Tushar Chande is an American trader of Indian origin. He was born in 1958. He became famous for his research in the field of technical analysis, which resulted in many new interesting indicators, most of which are widely used for trade so far. He is the author of books, scientific articles, the owner of nine US patents, a professional trader and analyst. He is the author and developer of trading systems, indicators VIDYA, Aroon, Adaptive Stochastic Oscillator. The result of working together with Stanley Kroll was the Stoch-RSI and Dynamic Momentum Index indicators.
In 1994, Chande offered traders his own methodology for calculating the EMA (exponential moving average) with a dynamically changing period of averaging (Variable Index Dynamic Average) – VIDYA. Averaging of EMA was made dependent on price volatility. Subsequently it turned out that this indicator reacts to price movements more accurately and responds more quickly to changes in the dynamics or direction of the market.
Aroon indicator was developed by Chande in 1995. It is used to measure the strength of the trend and the potential for its subsequent continuation. The indicator also determines the type of market movement: the sideway, decreasing or increasing.
Adaptive Stochastic Oscillator was also presented by the developer in the 90s. This indicator has a number of working features, as well as prominent disadvantages (a large number of false signals about oversold/overbought) and advantages (good work in trading corridors).
Stoch-RSI (Stochastic Relative Strength Index), developed by Chande in collaboration with S. Kroll in 1994. Their goal was to raise the sensitivity of the RSI (relative strength index), the disadvantage of which is the fluctuation between the boundary lines and the absence of signals for opening the position.
Dynamic Momentum Index was also the result of joint work of Chande and Kroll. The indicator is an analogue of the Wilder’s RSI. It has a variable-width window and the use of smoothing algorithm.
Tushar Chande is the author of books on markets technical analysis, one of the most famous – “Beyond technical analysis”.
Description of the indicator
The Aroon indicator consists of two lines, which are called:
Aroon up (usually a blue or green line);
Arron down (usually a red line).
These lines range from 0 to 100, as well as any other indicators of the oscillator type. The Aroon up line measures, on a 100-point scale, the number of periods (depending on the selected timeframe) that have passed since the beginning of the maximum peak price, and Aroon down, respectively, measures the number of periods relative to the lowest depression.
Aroon up = (number of periods minus the number of periods from the absolute maximum in the period) / number of periods * 100%;
Aroon down = (number of periods minus the number of periods from the absolute minimum in the period) / number of periods * 100%. In the Aroon indicator the key levels are usually identified – 70, 50, 30. These are the boundaries, overcoming which give signals about the market situation. If one of the indicator lines is constantly above 70%, and the second cannot break 30% from the bottom up (values tend to zero all the time), then there is a strong trend in the market.
If there is a bullish trend on the market, the Aroon up line is always in the 100% range – the trend updates the maximums so quickly that each new candle is a new peak value.