Aroon Indicator and Aroon Oscillator

Aroon Indicator

Aroon indicator is a young one, developed by Tushar Chande in 1995. Aroon was created to measure strength of a trend and potentials for its continuation as well as the quality and type of the trend: up-trend, down-trend or sideways moving market.

How to interpret Aroon indicator

There are two parts to the Aroon Indicator – two coloured lines: Aroon up (red line) and Aroon down (blue line).

The Aroon indicator scale ranges from 0 to 100.

There are 4 important levels to monitor when trading with Aroon indicator: 0, 30, 70 and 100.

The default time period for Aroon indicator is 25, on some panels - 14. But, it can be changed to, for example, 10-periods for shorter term trades or to 50-periods for longer ones.

How to trade using Aroon indicator?

1. When AroonUp crosses AroonDown upwards it is a bullish signal.

2. When AroonDown crosses AroonUp downwards it is a bearish signal.

3. When AroonUp and AroonDown move in parallel lines it suggest a consolidation period

AroonUp rules:

1. When AroonUp reaches the 100 level the uptrend is clearly strong; the closer it remains to the top the stronger the uptrend.

2. When AroonUp line fluctuates between 70 and 100 levels it suggests a Potential uptrend. The signal becomes stronger if at the same time AroonDown remains between 0 and 30 levels.

3. When AroonUp line fluctuates between 0 and 30 levels it suggests trend weakness and a possibility of a trend reversal.

Opposite true for AroonDown:

1. When AroonDown reaches the 100 level it suggests downtrend being strong; the closer it remains to the top the stronger the downtrend.

2. When AroonDown line fluctuates between 70 and 100 levels it advises on a Potential downtrend. The signal becomes stronger if at the same time AroonUp fluctuates between 0 and 30 levels.

3. When AroonDown fluctuates between 0 and 30 levels it suggests trend weakness and possible future trend reversal.

Aroon Formula

Aroon(up) = ((total number of periods — number of periods since highest close) / total number of periods) x 100

Aroon(down) = ((total number of periods — number of periods since lowest close) / total number of periods)) x 100

Aroon indicator shows how much time passed between the highest (up) or lowest (down) close since the beginning of a period (in percents).

The idea behind Aroon Oscillator

Aroon oscillator is based on Aroon Indicator. Aroon Oscillator is a trend-following indicator that illustrates the strength of a current trend and its potentials to last.

How to interpret Aroon indicator

An oscillator that oscillate between -100 and 100.

It oscillates around zero line, defining times when AroonUp and AroonDown lines of Aroon Indicator cross each other.

Aroon Oscillator Formula

Aroon Oscillator = AroonUp - AroonDown.

Conclusion

As market changes, traders adjust their trading approaches and methods from trend following to tools used during market consolidations. Aroon indicator helps traders to determine when to use a trend following indicators and tools and where to switch to oscillator like tools that work best in consolidating markets.

The positive value of Aroon Oscillator indicates an uptrend, while the negative value indicates a downtrend. The higher the absolute value of Aroon Oscillator, the stronger the trend.