What Exactly Is an Aroon Oscillator?
The Aroon Oscillator is a trend-following indicator that uses the Aroon Up and Aroon Down components of the Aroon Indicator to determine the strength of a current trend and its propensity to persist.
Knowledge of the Aroon Oscillator
Readings on the Aroon oscillator that are higher than zero signify an uptrend, while lower than zero readings signify a decline. Zero line crossings are looked for by traders as prospective trend changers. They also look for large movements above or below -50 to indicate abrupt price changes. Tushar Chande created the Aroon Oscillator in 1995 as a component of the Aroon Indicator system. Chande designed the technique to draw attention to transient trends. The Sanskrit origin of Aroon translates approximately to “dawn’s early light.”
Aroon Up, Aroon Down, and Aroon Oscillator are components of the Aroon Indicator system. Before creating the Aroon Oscillator, the Aroon Up and Aroon Down lines must be determined. Although the timeframe is arbitrary, this indicator commonly employs 25 periods. A smoother-looking indication and fewer waves are produced by using more periods. Fewer periods produce more waves and hasten the indicator’s reversal. Oscillator movement ranges from -100 to 100. A low oscillator value indicates a downturn and a high indicates an upswing.
Between 0 and 100, Aroon Up and Aroon Down oscillate. The stronger the trend, measured on a scale of zero to 100, the greater the indicator’s value. For instance, the Aroon Up value of a price that hit new highs one day ago would be 96 ((25-1)/25)x100). The Aroon Down value for a price that just reached new lows would be 96 ((25-1)x100).
Aroon Up and Aroon Down calculations employ highs and lows to construct an inverse link between the two indicators. Typically, the Aroon Down value will drop while the Aroon Up value rises and vice versa.
The oscillator value will be high and in line with the uptrend when Aroon Up maintains a high level following several new highs. The Aroon Down value will be greater and result in a lower oscillator value when the price of an investment is in a downtrend with several new lows.
When viewing a chart, the Aroon Oscillator line can be displayed with or without the Aroon Up and Aroon Down. Significant changes in the Aroon Oscillator’s direction might aid in finding a new trend.
Aroon Oscillator Formula and Calculation
The formula for the Aroon oscillator is:
- Aroon Oscillator=Aroon Up−Aroon Down
- Aroon Up=100∗(25−Periods Since 25-Period High)25
- Aroon Down=100∗(25−Periods Since 25-Period Low)25
- Aroon Oscillator=Aroon Up−Aroon Down
- Aroon Up=100∗25(25−Periods Since 25-Period High)
- Aroon Down=100∗25(25−Periods Since 25-Period Low)
The Aroon oscillator may be calculated by:
- Determine the number of periods since the most recent 25-period high to calculate Aroon Up. Divide the outcome by 25 after deducting this from 25. Divide by 100.
- Determine the number of periods since the most recent 25-period low to calculate Aroon Down. Divide the outcome by 25 after deducting this from 25. Divide by 100.
- To get the value of the Aroon Oscillator, subtract Aroon Down from Aroon Up.
- As each period finishes, repeat the process.
- The rate of change (ROC) indicator analyzes momentum by examining highs and lows and how far the current price has moved about a price in the past. The aroon oscillator tracks whether a 25-period high or low happened more recently.
Trade Alerts for the Aroon Oscillator
The Aroon Oscillator can produce trading signals or give information about the direction of an asset’s current trend. An uptrend starts when the oscillator crosses the zero line, the Aroon Up is above the Aroon Down, and the price has recently reached a higher than a lower-low. The Aroon Down crosses below the Aroon Up when the oscillator deviates from zero. A downtrend may begin if a low occurs more recently than a high.
Photo: Aroon Oscillator
The use of the Aroon Oscillator Has Some Limitations
When a long-term trend emerges, the Aroon Oscillator maintains a trader in the position. For instance, the price frequently sets new highs during an uptrend, keeping the oscillator above zero.
The indicator won’t give good trading indications when the market is turbulent since the oscillator and price will swing back and forth a lot. The indicator could offer trading recommendations that are too late to be helpful. Before a trade signal emerges, the price may have already taken a major path. When the trade signal appears, the price can be overdue for a pullback.
Additionally, there is no logic in assuming that a more recent high or low within the last 25 periods will automatically herald the start of a new and lasting uptrend or downturn. The indicator functions best with price action analysis, long-term trading fundamentals, and other technical indicators.
Conclusion
- Aroon Up and Aroon Down are used to build the oscillator in the Aroon Oscillator.
- The Aroon Up and Aroon Down indicators count the number of cycles since the previous high and low of 25 cycles.
- When Aroon Up goes above Aroon Down, the Aroon Oscillator passes over the zero line. The oscillator crosses the zero line when the Aroon Down moves below the Aroon Up.
