The Aroon Indicator: What Is It?
Technical indicators like the Aroon indicator may be used to determine the direction and intensity of a trend and changes in an asset’s price. The indicator counts the intervals between highs and lows over time. Strong uptrends and downtrends are supposed to reach new highs and lows often, respectively. When this occurs, the indication lets you know when it isn’t.
The “Aroon up” line of the indicator, which gauges the strength of uptrends, and the “Aroon down” line, which gauges the strength of downtrends, make up the whole system. Tushar Chande created the Aroon indicator in 1995.
Using the Aroon Indicator to Calculate
Tracking the high and low prices over an average of 25 periods is necessary for the Aroon computation.
- Keep track of an asset’s 25-period highs and lows.
- Note how many cycles have passed since the last peak and low.
- These figures should be entered into the Up and Down Aroon formulae.
What Can You Learn from the Aroon Indicator?
The Aroon Up and Aroon Down lines oscillate between zero and one hundred, with values close to one hundred suggesting a strong trend and values close to zero indicating a weak trend. The downtrend’s strength and the upswing’s weakness are inversely correlated with the Aroon Up. This indicator’s primary presumption is that a stock’s price would routinely close at new highs during an uptrend and new lows during a downturn.
The indicator scales between 0 and 100 and focuses on the last 25 sessions. As a result, a value of Aroon Up greater than 50 indicates that a new high was reached within the previous 12.5 sessions. A reading that is close to 100 indicates a recent high. The Down Aroon uses the same ideas. A low was seen during the 12.5 times when it was over 50. A recent low has been seen if the Down reading is close to 100.
Crossovers can indicate locations of entrance or departure. Ascending above Down might be a purchase indication. If Down crosses below Up, it can be a sell indication. It may indicate that the price consolidates when both indicators are below 50. There are no new record-breaking highs or lows. To determine the way the price moves, traders might look for breakouts and the subsequent Aroon crossover.
A Case Study of the Aroon Indicator
An illustration of the Aroon indicator and its possible interpretation may be seen in the chart below.
The Aroon indicator and an oscillator that blends both lines into a single value between 100 and -100 are both seen in the chart above. When the Aroon Up and Aroon Down crossed, the trend had changed. Before the reversal, when the index was trending, the Aroon Down remained relatively low, indicating that the index had a bullish bias. Despite the surgeon on the far right, the Aroon indicator hasn’t yet indicated a positive bias. This is because, despite the rally, the price recovered so swiftly that it hasn’t set a new high in the previous 25 periods (at the time of the snapshot).
The Distinction Between the Directional Movement Index (DMI) and the Aroon Indicator
The Aroon indicator is comparable to Welles Wilder’s Directional Movement Index (DMI). It also employs up and down lines to indicate a trend’s direction. The primary distinction is that the Aroon indicator formulae strongly emphasize the interval between highs and lows. The DMI measures the price difference between recent and lows and previous highs and lows. Price, not time, is the DMI’s primary determining factor.
Use of the Aroon Indicator Has Some Limitations
The Aroon indicator can occasionally indicate a decent entry or exit but also give bad or inaccurate indications. The purchase or sell signal can come too late after the price has moved significantly. This occurs because the indicator is not predictive and instead looks backward.
Although a crossing may appear positive on the indicator, this does not guarantee that the price will move significantly. The indicator considers the number of days since a high or low and ignores the size of changes. Crossovers will happen even if the price is mostly unchanged since a new high or low will ultimately be recorded within the previous 25 periods. To make wise trading selections, traders must still employ price research and maybe other indications. It’s not recommended to rely entirely on one sign.
- Two lines make up the Aroon indicator. An upward line counts the intervals since a high, and a downward line counts the intervals since a low.
- Since the indicator is normally applied to data across 25 periods, it displays the number of periods since a peak or low over 25 periods.
- Bullish price behavior is shown when the Aroon Up is higher than the Aroon Down.
- Bearish pricing behavior is indicated when the Aroon Down is higher than the Aroon Up.
- A crossing of the two lines may indicate trend changes. For instance, when Aroon Up crosses over Aroon Down, it can signal the beginning of a new upswing.
- Indicator values range from 0 to 100. A value greater than 50 indicates that a high or low (whichever line is higher than 50) was seen within the previous 12 periods.
- If the measurement is under 50, the peak or low was experienced during one of the 13 periods.