The Aroon indicator was developed by Tushar Chande in 1995, and is an indicator based trading system that determines whether a trading instrument is trending or not and how strong the trend is. As conceived by the creator, Aroon had to determine points for entering trades before other indicators and inform traders about this. The Aroon indicator is primarily used to calculate the strength and direction of the overall trend or if the market is flat and therefore ranging.
What is the Aroon indicator?
The Aroon indicator uses the extreme values during a trend movement, and the intersection values with the zero axis as the leading indicators. The Aroon indicator includes two lines:
- Aroon Up is displayed in blue (or green);
- Aroon Down is colored red.
Aroon indicator line calculation
Aroon indicator takes two charts as a basis, which are located above and below the line of price movement. The upper line, “Up”, displays in the range from 0 to 100 the number of hours or days (depending on the setting of the period) that have passed after the formation of the maximum values. The bottom line is called “Down” and also shows the number of periods (PE) and negative values.
The following formulas are used to calculate the values:
Aroon Up = [(PE) – (PE after the price peak)] / (PE) x 100.
Aroon Down = [(PE) – (PE after the lowest price)] / (PE) x 100.
For example, the indicator is applied to the daily chart, and the timeframe is set to 10 days. If the maximum price shoots on the same day, you get the following calculation:
(10-0) / 10 * 100 = 100.
But if the extremum struck 5 days ago, then the value will change:
(10-5) / 10 * 100 = 50.
Aroon indicator levels
Indicator levels indicate significant changes in the market.
Aroon Up values can be as follows:
- More than 70% – a bullish trend prevails in the market;
- Within 50-70% – an increasing trend is strengthening and filling up with strength;
- 30-50% – the trend is decreasing, but not yet broken;
- Less than 30% – buyers have lost interest.
For the Aroon Down line, the level indicators indicate the following:
- More than 70% – sellers captured the market;
- Within 50-70% – bears enter the market, which means that a declining trend will begin soon;
- 30-50% – the bearish grip is weakening; however, the bulls cannot yet prevail;
- Less than 30% – sellers lost interest.
How to choose the Aroon Period?
By default, the instrument settings are set to 14. However, some traders increase the settings to help identify larger trend areas. The choice is left to each individual trader and can be adjusted to suit your trading style. There are no clear rules for setting the timeframe. Small time intervals will help to catch small trend areas. While large values will help to trade on long-term trends, they may miss small market fluctuations.
I personally prefer to trade using the default indicator settings on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower timeframes and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
How to use the Aroon indicator?
When the indicators of the instrument break above level 50, we can confidently talk about establishing a bullish trend in the market.
In a situation where the Aroon indicator falls below the level of -50, we are talking about setting a bearish trend.
If the Aroon indicator goes beyond the limits of zones 50 and -50, a steady trend can be observed when flat methods and trading against the trend may not be a wise idea. You also need to monitor when the indicator breaks through the zero axis.
In this situation, the following options are possible:
The Aroon Up line drops as the price moves up. This indicates the possibility of a quick change of movement to the opposite.
The zero axis breaks through from the bottom up. In this situation, the price could continue to rise.
Level 0 crosses from top to bottom. This can mean that the price will continue to decline.
Aroon indicator trend filter
You can get information about the presence and strength of the trend if you install Aroon Oscillator as a trend filter.
The location of the lines may be:
- 70-100% – the presence of a strong trend, so transactions may be carried out in one direction (trade only on pullbacks, etc.);
- 50-70% – the trend will continue;
- The lines move in opposite directions (one gains height, and the second decreases) – a new trend appears.
Aroon indicator consolidation
Consolidation in the market comes at a time when the lines of Aroon indicator are moving in parallel. The way out of this situation occurs when the price has long been in one position, and then the charts intersect, after which they began to move in different directions. This means that the consolidation zone has ended, and a new trend movement has arisen.
Aroon indicator trading strategies
The Aroon indicator can be used in any trading strategy that aims to follow the overall trend. It is necessary to supplement and reinforce the generated signals with further market analysis. Whilst the Aroon indicator can independently determine the presence and strength of the trend, it can be supplemented with other technical indicators such as the Stochastic Oscillator and Relative Strength Index.
Aroon indicator buy signal
1) There is a global upward trend in the market; namely, the price is strictly above the moving average with a period of 100.
2) The blue line of the Aroon indicator crosses the red line from the bottom up.
Aroon indicator sell signal
1) There is a global downtrend in the market; namely, the price is strictly below the moving average with a period of 100.
2) The red line of the Aroon indicator crosses the blue line from the bottom up.
Aroon indicator conclusion
The Aroon indicators main advantage is the ability to determine not only the presence of a trend but also its strength. This combination is rare in technical market analysis. The indicator can be combined with other trading tools, which allows you to get a detailed assessment of the market and create your forex trading strategies.
The methods of implementing the Aroon indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Aroon indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.