Understanding the Aroon Indicator
The Aroon Indicator, created by Tushar Chande in 1995, is a technical signal based on patterns that helps determine the strength and direction of a trend in assets, stocks, or cryptocurrencies. It is similar to the Average Directional Index (ADX).
The term “Aroon” is derived from the Sanskrit language, meaning “the earliest light of the dawn.” Chande chose this name because the indicator is designed to identify the beginning of a new trend. Traders can utilize Aroon Indicators to detect emerging trends, identify consolidations, define corrective periods, and predict price reversals.
The Aroon indicators track the timing of the most recent highs and lows. Lower Aroon values indicate that a high or low occurred further in the past, while higher Aroon values indicate more recent highs or lows. Higher Aroon values suggest a stronger trend, while lower values indicate a weaker or non-existent trend.
The Aroon-Up and Aroon-Down indicators measure the number of time periods since a price reached a high or low. For example, the 25-day Aroon-Up indicates the number of days since a 25-day high, while the 25-day Aroon-Down indicates the number of days since a 25-day low. Unlike traditional momentum oscillators, the Aroon indicators focus on price in relation to time.
These indicators offer several benefits to market researchers and traders. Aroon crossovers can serve as trading signals, indicating trend shifts or market reversals. For instance, a bullish crossover occurs when the Aroon-Up indicator crosses above the Aroon-Down indicator, while a bearish crossover happens when the Aroon-Down indicator crosses above the Aroon-Up indicator.
The Aroon Indicator values range from zero to one hundred. A reading above 50 indicates that a high or low occurred within the previous 12 periods, with the higher line indicating the occurrence. A value below 50 suggests that the high or low occurred in the past 13 periods. The Aroon Up decreases with weaker uptrends and greater declines, while the Aroon Down follows the opposite pattern.
Calculating Aroon Indicator Values
To calculate the Aroon Indicator, follow these steps:
- Select a specific period, denoted as “X,” for the Aroon Indicator.
- Use the following formulas to calculate the Aroon-Up and Aroon-Down indicators:
AroonUp = 100 * ((X – Number of periods since highest high)/X)
AroonDown = 100 * ((X – Number of periods since lowest low)/X)
While the Aroon Indicator can sometimes indicate favorable entry or exit points, it may also provide misleading signals. The buy or sell signal may come too late, after a significant price movement has already occurred. This is because the indicator relies on historical data and is not predictive. Traders should consider using other technical indicators, such as on-balance volume (OBV), moving average convergence divergence (MACD), relative strength index (RSI), accumulation/distribution indicator, and stochastic oscillator, in conjunction with the Aroon Indicator for more effective trading.
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