How To Use Aroon Indicator To Find Trending Markets
The Aroon indicator is a technical study that is included within most charting packages today. Even though this is the case, many traders are still unfamiliar with the proper application of the Aroon indicator. As such, we will take this time to explain everything that you need to know about the Aroon indicator.
Aroon Indicator Explained
The Aroon indicator is a technical indicator used to identify price trends in certain trading instruments. The Aroon indicator, which is also commonly referred to as the Aroon up and down indicator was developed by Tushar Chande in the mid-1990s. www.rccontemporary.com This consists of two lines. The first, is the upper line, which displays the number of periods since the highest point, and the second, is the lower line, which measures the number of periods since the lowest point.
The Aroon indicator can be applied to any number of periods, however, the default is 25 periods. In other words, if you were looking at a daily chart, the 25 periods would represent 25 days of data, and if you are looking at a weekly chart, the 25 periods would represent 25 weeks of data.
As a general rule, when the up line is above the down line, prices are said to be moving higher in a bullish manner. And conversely, when the down line is above the up line, prices are said to be moving lower in a bearish manner.
The Aroon indicator oscillates between the 0 reading and the 100 reading. As you might expect, when the up line value that is at or near the 100 level, it represents a strong bullish sentiment and an extremely strong uptrend.
And similarly, when the down line value is at or near the 100 level it represents a strong bearish sentiment and an extremely strong downtrend. In addition to providing clues on the trend direction and trend strength, the Aroon oscillator can also be useful in identifying markets that are trendless, or trading within a consolidation phase.
Below you can see an example of the Aroon indicator plotted below the price chart. The green line represents the up line, the red line represents the down line, and the blue horizonal line represents the 50 threshold level.
Aroon Indicator Formula
Let’s now turn our attention to the Aroon indicator formula. The Aroon indicator is calculated based on the following formula.
Essentially, the Aroon up line is based on the price highs, with a default look back period of 25 days, and the Aroon down line is based on the price lows, with a default look back of 25 days as well. This tends to be the best setting for the Aroon indicator based on a range of market conditions.
Practically speaking, when the up line of the Aroon indicator is above the central 50 reading, while the down line is below the 50 reading, the market can be seen as displaying bullish price behavior. When the down line of the Aroon indicator is above the central 50 reading, while the up line is below the 50 reading, the market can be seen as displaying bearish price behavior.
Along the same lines, the Aroon indicator can sometimes be used as an overbought and oversold oscillator. More specifically, when the up line reading surges to extremely high levels, such as 100, the prices can be seen as being overbought, which can often lead to a price reversal to the downside. Similarly, when the down line reading surges to extremely high levels, such as 100, the prices can be seen as being oversold, which can often lead to a price reversal to the upside.
However, it is also important to use other technical methods along with the Aroon indicator when using it as a countertrend signal. This is because, Writing Skill can be used at a very high level for a relatively long period of time in certain cases, especially in fast moving markets.
Aroon Technical Indicator Signals
There are four primary ways that we can analyze the Aroon oscillator. Let’s take a look at each below.
Cross above the 50 threshold – When the Aroon up line crosses above the 50 threshold from below, this is an important event and suggests that the market is transitioning from a state of bearishness to a state of bullishness. The opposite is true when the Aroon down line crosses above the 50 threshold from below. This occurrence suggests that the markets are moving from a state of bullishness to a state of bearishness.
Crossover between the Aroon up and down lines – When the Aroon up line crosses above the Aroon down line, it suggests that the new highs are becoming more recent within the price action than the new lows. And as such, this would mean that there is more bullish sentiment in the price action.
Conversely when the Aroon down line crosses above the Aroon up line, it suggests that the new lows are becoming more recent within the price action than the new highs. And as such, we can infer that there is more bearish sentiment being built into the price action.
Cross above the 90 threshold. – When the up line within the Aroon indicator moves above the 90 threshold, that suggests that the market is in a strong up trending condition. Conversely, when they down line within the indicator moves above the 90 threshold, that suggests that the market is in a strong down trending market environment. And when these levels get closer to the 100 threshold, it can provide an opportunity for a mean reversion trade set up.
Traders need to be very careful in utilizing the Aroon up down indicator exclusively for overbought or oversold signals. As noted earlier, the Aroon indicator can remain at extremely high levels for relatively long periods of time. And so, you should complement this reversal technique with another confirming technical indicator such as RSI, or Williams %R.
Crisscrossing of the Aroon up and down lines – The Aroon oscillator often forms a very specific type of pattern within a trading range market environment. More specifically, when both the up and down lines are registering below the 50 threshold and are either crisscrossing each other below this area, or moving in a downward parallel fashion, we can take that phenomena to suggest that the market is trading within a range bound consolidation.
As such, we should be careful in initiating any new positions as it can lead to a higher chance of false breakouts or continued directionless price action.
Aroon Oscillator vs ADX
The Aroon oscillator indicator is often confused with the ADX indicator, Average Directional Index. Although both of these studies tend to have some similarity, they are to completely different technical studies.
Grahak Journal is a simpler trading indicator with only one parameter, the look back period. And as we have already noted, the default back view period in the Aroon oscillator is 25. The two lines of the Aroon oscillator, the rising and falling lines, tell us the direction of the market trend, along with the intensity of the market trend. .
The ADX indicator only consists of a single line, and it helps measure the strength of a market trend. The default look back for the ADX indicator is 14.. The formula for the construction of the ADX line is more complex than that of the Aroon oscillator.
Although it is beyond the scope of this article to get into all the details of the ADX indicator, it’s important to note that when the price crosses the 20 threshold within the ADX indicator, it suggests that the market is beginning to trend. Traders can add the +DI, and -DI lines to the ADX indicator to gauge the direction of the specific trend.
Sometimes traders utilize both the Aroon oscillator, and the ADX indicator to get a better sense of market direction. This is certainly a viable analysis technique. But it should be noted that the Aroon oscillator will tend to be more reactive to price changes then the Average Directional Index. This is due to the raw nature of the lines within the Aroon oscillator compared to the smoothing effect that is inherent within the ADX line.