Aroon Indicator is a technical indicator that helps identify when the trend of an investment asset is likely to change.
The Aroon Oscillator is an indicator designed by Tushar Chande in the mid-1990s. More precisely, his description appeared on the September 1995 issue of the “Time price oscillator.”
With this indicator, you can anticipate the emergence of a trend.
In practice, Aroon measures the time it takes an asset to record its highest and lowest point in a given period.
The Aroon climb line denotes an upward trend, while the Aroon climb line denotes a downward trend.
The Aroon indicator is a tool belonging to the family of trend indicators (such as moving average, ADX, Donchian Channel, MACD).
The name does not come from its inventor, but from the Sanskrit word “aroon,” which means “the early light of dawn.”
This indicator identifies the birth of a trend that is about to blossom, just like the dawn.
Like ADX, this oscillator takes into account two opposite directions, one that considers max and one that considers min within a range.
This indicator measures the buying and selling pressures in place over a given time horizon.
From an observational point of view, Aroon considers only closing prices and neglects all intraday variations.
This is certainly not an advantage. Just think of the case where a financial instrument leaps 10% downwards and then goes to absorb this movement.
This is very significant when analyzing a trend, but Aroon entirely ignores it.
In the original version, the author considers 14 periods.
What is the Aroon Indicator
It consists of the Aroon Up and the Aroon Down.
Suppose you used the 14-period indicator and had the minimum 14 periods ago and the maximum in the last period.
The Aroon Up would have a value of 100 and the Aroon Down of 0, which would indicate a trend is sharply upward.
Chande’s studies demonstrated excellent reliability in identifying trend changes through a weakening of the previous trend and the consolidation of the opposite trend.
One of the objectives of this oscillator is to anticipate the reversal of a trend that is signaled by cutting from the bottom up or vice versa of the “0 lines”.
The interpretation of the indicator is quite intuitive. The stronger the positive trend, the higher the value of the Aroon Up and the lower the value of the Aroon Down.
You have the exact opposite of the negative trend.
The Aroon can be positioned between the values of +100 and -100 with the centerline of zero; in this, it is identical to other oscillators.
The further the oscillator moves away from the zero lines, the stronger the underlying asset trend will be.
Obviously above zero, we are in the presence of uptrend; below zero, we are in the presence of a downtrend.
Readings greater than 70 of the Aroon Up or Down indicate the presence of a rather strong bullish or bearish trend.
When the indicator drops below 50, however, we will have confirmation of a trend that is losing strength.
The moment both Up and Down indicators move in tandem, then we will be faced with a consolidation phase or no trend.
How to use the Aroon Indicator
The purpose of this oscillator is not to provide trading signals to enter the market.
The Aroon helps the trader interpret the momentum, direction, quality, and strength of the financial instrument trend.
This oscillator shall be supplemented with other technical information or indicators.
Given that the Aroon is a trend oscillator, there are two signals offered by this algorithm:
define the strength of a trend;
identify trend change signals.
The logical principle of this indicator is that the price of an asset during a downward trend phase always tends to close towards the recent low (so the Aroon Down will be high).
In the upward trend, it tends to close towards the recent lows (so the Aroon Down will be high).
The Aroon Up will touch 100 if the maximum is reached at the last observation, while it will touch 0 if this maximum is recorded N previous sessions.
The same argument, but on the contrary, will apply to the Aroon Down, which will touch the value 100 if the minimum is reached at the last observation.
In contrast, it will touch the value 0 if the minimum has been recorded N previous sessions.
The Aroon flag is used in two ways:
exploiting signals near extreme levels by utilizing the intersections between the two lines.
We stress that since this is a trend indicator, it is only useful if there is a trend in progress. If we’re in a side phase, it’s ineffective.
AROON UP CUTS THE AROON DOWN UPWARDS
This setup indicates the possible start of an upward trend.
AROON DOWN CUTS THE AROON UP
This setup, on the other hand, indicates the possible start of a downtrend.
In other cases, we take advantage of the peaks of the two Aroon Lines to monitor the strength of the trend and then eventually when to leave a position because the trend has weakened.
AROON UP or DOWN > 70>
indicates a strong trend towards buying or selling, respectively.
AROON UP or DOWN < 30
indicates a trend in exhaustion with a possible future reversal.
Often on the platform is the Aroon oscillator, which is the difference between Aroon Up and Aroon Down, which in turn oscillates between -100 and +100.
To detect inversion signals, observe when the oscillator passes above or below the “0 lines”.
There will be a bullish signal when the Aroon goes from contrary to positive values;
You’ll get a bearish signal when the Aroon goes from positive to negative.
When the indicator is close to 100, it will indicate a sharp upward thrust, while close to -100, it will signal an intense downward push.
With the oscillator, you can get a signal by exploiting its passage through the Zero line.
Using the Aroon as a filter for a trading system, only long positions should be considered when the Aroon Up has values between 70 and 100, and at the same time, the Aroon Down has values between 30 and 0.
Similarly, only short positions should be evaluated when the Aroon Down has values between 70 and 100, and at the same time, the Aroon Up has values between 30 and 0.
When the two lines travel parallel, it is a clear symptom of consolidation.
Once you have entered a direction, the exit directions can be:
The Aroon up drops below 50;
The Aroon down cuts the Aroon Up upwards and reaches values higher than 70;
The oscillator drops below -70.
The three options above, taken at the same time, may also indicate the reversal of the trend.
HOW TO CALCULATE the Aroon Indicator
This oscillator consists of two lines that sway between 0 and 100, called “Aroon Up” and “Aroon Down.”
One measures the buying thrust, the other measures the selling thrust during a specific observation period.
Here is the calculation formula:
AroonUp = 100* (N – (number of observations since last maximum))/N
AroonDown = 100* (N – (number of observations since last minimum))/N
Looking at the formulas, it is understood that these two lines depending on the parameter N, which represents the number of observation periods that is usually equal to 14.
The standard setting of the Aroon indicator is 14 periods, which is excellent for daily timeframes.
If you decide to lower it to use in intraday timeframes, it would be better to raise the parameter to prevent intersections on intersections between the two lines, forming infinite false signals.
The Aroon line measures in percentage terms the difference between the Aroon Up and the Aroon Down.
The 14-period Aroon Up indicates the number of bars placed above the maximum level of 14 periods ago.
The 14-period Aroon Down indicates the number of bars placed below the minimum level of 14 periods ago.
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