The Aroon indicator was developed to identify market trends as well as the direction and strength of a price’s movement. Essentially, it shows how trends weaken or strengthen within a certain period.
Contents:
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About the creator
The Aroon indicator was created by the famous US trader of Indian origin, Tushar Chande. Born in 1958, he became famous for his research in the field of technical analysis, during the course of which he developed many indicators. These were new and groundbreaking technical analysis tools at the time, and most of them are still widely used in trading today.
Chande has authored several books and scientific articles, is the owner of nine US patents, and is a professional trader and financial analyst. The trading systems and indicators he has developed and co-developed include VIDYA, Aroon and Adaptive Stochastic Oscillator. Working together with Stanley Kroll — another famous US trader and technical analysis tool developer — Chande also contributed to the development of the Stoch-RSI and Dynamic Momentum Index indicators.
One of the most famous books about market analysis authored by Chande is Beyond Technical Analysis.
Description
The Aroon indicator consists of two lines: the Aroon Up line, which is usually a blue or green line; and the Aroon Down line, normally red. Like with most oscillators, both lines move within a range from 0 to 100.
The Aroon Up line indicates the number of time periods that have passed since the maximum peak price in a given timeframe.
The Aroon Down line measures the number of time periods that have passed since the lowest drop in price in a given timeframe.
Here are the formulas.
Aroon up = (Number of periods — the number of periods since the absolute maximum in the given period) / number of periods × 100
Aroon down = (Number of periods — the number of periods since the absolute minimum in the given timeframe) / Number of periods × 100
The Aroon indicator’s key levels are usually identified as 70, 50 and 30. These boundaries being crossed is a potential signal about the market trend.
For example, if one of the indicator lines is constantly above the level of 70, and the second keeps staying below 30 or near zero, then there is a strong trend in the market. Alternatively, if there is an uptrend in the market, the Aroon Up line will always be in the 100 range when following a corresponding candlestick chart, as the trend updates the maximum peaks so quickly that each new candle is a new peak value.
Indicator levels
If the indicator lines cross, that may signal the beginning of a new trend or the end of a flat market phase. The following table explains the relative importance and significance of each indicator level.
| Indicator line | Level | Meaning |
|---|---|---|
| Aroon Up | >70 | Strong uptrend |
| Aroon Up | 50 to 70 | Uptrend is gaining momentum |
| Aroon Up | 30 to 50 | Uptrend is continuing but losing momentum |
| Aroon Up | <30 | Buyers no longer dominate the market |
| Aroon Down | >70 | Strong downtrend |
| Aroon Down | 50 to 70 | Downtrend is forming |
| Aroon Down | 30 to 50 | Downtrend is losing momentum |
| Aroon Down | <30 | Sellers no longer dominate the market |
The default value of the indicator is 14, reflecting the timeframe being analyzed. If you increase it, the indicator will be set to identify larger trends. A larger value that is commonly used is 25. Traders need to find the optimal indicator value for themselves after analyzing their trade history and trying various other indicator values in trading.
Setting the indicator value to 30 helps identify and trade on larger trends, but the smaller ones will not be detected.
Indicator signals
1️⃣ First type
Aroon indicator first-type signal shows the extreme values reached by the asset price. In this case, the indicator lines are located on opposing ends of the indicator window and reflect the prevailing uptrend or downtrend.
If Aroon Up is above 70 and Aroon Down is below 30, that is a signal of an uptrend.
If Aroon Up is below 30 and Aroon Down is above 70, that is a signal of a downtrend.
If Aroon Up crosses the 50 level, that means the uptrend is facing resistance and may reverse downward.
2️⃣ Second type
The second-type signal of the Aroon indicator is when its lines are parallel. It indicates that the current market trend is gaining momentum and strengthening.
3️⃣ Third type
The third-type signal is when the Aroon indicator lines cross. It indicates that the market is in a long-term trend. This usually occurs when the Aroon Down goes upward, or the Aroon Up goes downward. The main factor determining the third signal is that the indicator lines are between the level of 30 and 70.
Conclusion
The main characteristic of the Aroon indicator is that it helps identify the direction of market trends and their strength. That is a decent combination. On top of that, the Aroon indicator is useful in identifying the end of flat market phases and can be comfortably added to any trading strategy. In the meantime, just like with any other technical tool, it is advisable to use it together with other indicators to increase efficiency.
Try it on Olymp TradeRisk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
