Aroon Indicator is used to identify the existence, changes, and corrective retracements and gauge the strength of an ongoing trend in financial markets.
What Is an Aroon Indicator?
In 1995, Tushar Chande
came up with the concept of Aroon Indicator (a part of many technical pattern-based signals
) that determines if the value of asset/stock/cryptocurrency is rising and how strong the trend is, somewhat similar to the Average Directional Index
In the Sanskrit language, the word "Aroon" signifies "the earliest light of the dawn." Because the indications are meant to identify the start of a new trend, Chande picked this moniker for this technical indicator. Aroon Indicators can be used by traders to detect developing trends, identify consolidations, define corrective periods, and predict reversals in the asset's price.
The two Aroon indicators essentially track when the most recent highs and lows happened, correspondingly. Lower Aroon values indicate a more distantly occurring high or low, whereas higher Aroon values indicate a more recently happening high or low. A stronger trend is indicated by higher Aroon values, whereas a weaker trend or no trend is indicated by lower Aroon values.
The Aroon-Up and Aroon-Down indicators monitor the number of time periods since a price struck an x-day high or low. For example, the number of days since a 25-day high is noted by a 25-day Aroon-Up while the number of days since a 25-day low is counted by the 25-day Aroon-Down indicator. This way, the Aroon indicators are different from traditional momentum oscillators in that they are concerned with price in relation to time.
These indicators can help market researchers and traders in multiple ways
. Aroon crossovers can be used to provide trading signals. Overlaps of the two Aroon indicators are typically considered trend shift or market
reversal signals. An example of such crossovers or overlaps includes the Aroon-Up indicator generating a bullish crossover just above the Aroon-Down indicator or the Aroon-Down indicator generating a bearish crossover just above the Aroon-Up indicator
The value of indicators range between zero and one hundred. A reading of more than 50 indicates that a high/low (whichever line is higher than 50) occurred within the previous 12 periods. A value of less than 50 indicates that the high/low occurred during the 13-period time frame. The weaker the uptrend and the greater the decline, the lower the Aroon Up, and vice versa.
How to Calculate Aroon Indicator Values?
Here’s how you can calculate the Aroon Indicator:
- Choose a specific period “X” for the “Aroon Indicator”
- Use the following formulas to calculate AroonUp and AroonDown indicators:
AroonUp = 100 * ((X – Number of periods since highest high)/X);
AroonDown = 100 * ((X – Number of periods since lowest low)/X);
Aroon Indicator may indicate excellent entry or exit points at times, but it may also offer faulty or misleading indications
. The buy or sell signal may arrive too late after a significant price movement already takes place. This occurs because the indication isn't predictive and uses historical data. As a result, rather than responding solely to the Aroon signal, traders should look into other technical indicators
, corroborating price and volume activity to trade more effectively. These include, but are not limited to on-balance volume
(OBV), moving average convergence divergence (MACD
, accumulation/distribution indicator
, and stochastic oscillator.