Aroon Indicator : All you need to know
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The aroon indicator is a custom technical indicator that belongs to the category of oscillators in technical analysis. Similar to the Directional Movement Index (DMI) technical tool, it also moves between fixed upper and lower bounds. The indicator consists of two lines, called ascending and descending lines which simultaneously define the direction in which the price is moving.
When the aroon UP and aroon Down lines are opposite, traders see this as a signal that a peak or trough is forming. These two lines basically indicate the momentum of the price, namely the momentum. Moreover, they also measure the direction of the security price. In this sense, the aroon indicator is also called a directional indicator, it indicates the direction of the trend as well as the momentum .
Unique Benefits of using Aroon Indicator
- The first approach of this indicator makes it possible to anticipate the transition from the trend to a range.
- Its second function is to determine the strength of the movement.
The aroon is bounded between 0 and 100.
It calculates the number of periods elapsed since the last highest or lowest.
Aroon an essential indicator for traders
The aroon indicator, also called the aroon or aroon oscillator, is used to determine the strength of a trend. Traders use the readings of the aroon indicator to determine price behavior.
The aroon indicator is mainly used to understand if the price of the security is going up, down or moving in a range.
Every trader must know how to assess the strength of a trend and this indicator rightly addresses this issue, because indeed, this two-in-one tool is a must-have indicator that will help you correctly identify trend reversals, their strengths and their weaknesses.
Some traders consider the aroon indicator to be an upgraded version of the average directional index or adx .
The adx indicator also works the same way, in that it behaves like an oscillator and helps give the strength of a trend.
This indicator is used to trade on the forex market (Euro, US Dollar, Yen, etc.), crypto-currencies (Bitcoin, ethereum, Ripple, Litecoin, etc.) commodities (Oil, copper, gold, etc.) ), shares (Total, cap gemini, etc.) as well as indices (DAX, CAC40, Nasdaq Composite, Dow Jones, S&P, etc.).
Difference between aroon indicator and Directional Movement Index (DMI)
As noted, the Arron indicator is partly similar to the Directional Movement Index or DMI which was developed by Welles Wilder.
Its objective is to identify the direction of a trend based on ascending and descending lines, with the difference that the aroon indicator is built from the period between the highs and lows, while the DMI indicator measures the price difference between the current highs and lows with the highs and lows over a past period.
Because of this, the main difference between the aroon oscillator and the DMI is the price.
Formula or calculation method of the aroon indicator
The indicator calculates the number of periods since the last high or low.
The aroon is calculated in two steps, the aroon Up and the aroon Down.
Aroon UP
It calculates the number of periods elapsed since the last high.
The aroon Up indicator is calculated as follows: [(n - Number of sessions or higher is greater than the highest in n-1)* 100 ] / n.
Aroon Down
It calculates the number of periods since the last low.
The aroon Down indicator is calculated as follows: [(n - Number of sessions or lower is less than the lowest in n-1)* 100 ] / n.
Interpretation of the aroon indicator in trading
The aroon is a trend indicator that is used to anticipate the transition from trend to range and also determine the strength of the move.
The buy signal
- A buy signal is identified by the upward crossing of the aroon Up with the aroon Down.
- The bullish direction is strong when the aroon Up is moving between 70 and 100.
- Closing the position should be done when the two indicators cross in the other direction.
It is important not to buy a security when the aroon Up is below the 50 level, as this indicates that the uptrend is weak and the risk of loss is high.
The sell signal
- A sell signal is identified by the bearish crossing of the aroon Up with the aroon Down.
- The bearish direction is strong when the ARRON Down is moving between 0 and 30.
- Closing the trade should be done when the aroon Up and aroon Down indicators cross in the other direction.
It is important not to take a short position on a security when the aroon Down is above the 50 level, as this indicates that the downtrend is weak and the risk of loss is high.
When the aroon up and the aroon down move in parallel, then we can speak of a period of consolidation or trading range.
We can define the end of one of these configurations when the two curves have reached an extreme or if they intersect.
Trading strategy with the aroon indicator on the stock market
The basic strategy for this indicator is to use the crossings of the two lines aroon Down and aroon Up.
A strong uptrend is detected when Aroon(up) fluctuates between 70 and 100 levels while Aroon(down) fluctuates between 0 and 30 levels.
Alternatively, a strong downtrend is detected when Aroon(down) fluctuates between 70 levels and 100 while Aroon(up) fluctuates between levels 0 and 30.
A buy signal can be decided when the Aroon oscillator crosses the zero axis from bottom to top. Conversely, a sell signal can be decided when the Aroon oscillator crosses the zero axis from top to bottom.
How to filter false signals of Aroon Indicator?
- Sell when the aroon Up crosses the aroon Down downwards but this crossing is above the threshold of 50 (Red line on the chart).
Indeed, when the aroon Down is above 50, it means that the downtrend is weak.
- Buy when the aroon Up crosses the aroon Down upwards but this crossing is below the 50 threshold (Red line on the chart).
Indeed, when the aroon Up is under 50, it means that the uptrend is weak.
This is all the more true when the price moves in a range.
Advantages Aroon indicator
- The advantage of the aroon technical oscillator is that it combines two indicators on its own.
- Indeed, aroon allows both to anticipate the direction of a trend and at the same time to measure its strength.
Disadvantages of Aroon indicator
Using the aroon indicator on its own is not recommended, as there is a risk of it generating false signals.
What you need to know and remember about the aroon indicator for trading in forex / stock market
- The aroon indicator is a tool that can help you spot the strength of a trend and follow it until a high point of buying or selling is reached.
- The Arron indicator is made up of two lines, an ascending line that measures the number of periods from a high, and a descending line that measures the number of periods from a low.
- The indicator moves in a range from zero to 100.
- A value above 50 means that a high/low line (the line above 50) has been observed in the last 12 periods.
- A value less than 50 means that the highest/lowest was observed in the 13 periods.
- When the aroon Up is above the aroon Down, it indicates bullish price behavior.
- When the aroon Down is above the aroon Up, it indicates bearish price behavior.
- Crossings of the two lines can signal trend changes. For example, when aroon Up crosses aroon Down, it could mean that a new uptrend is starting.
Summary
The Aroon technical indicator is one of the trending technical indicators used in technical analysis by traders. This makes it possible to observe and then to evaluate the courses if they evolve or not within a trend. Aroon is made up of two elements to determine whether a movement is in a trend or in a consolidation phase (trading range): Aroon UP and Aroon DOWN.
Aroon Technical Indicator Tutorial with example, How to use Aroon, Filter false signals of Aroon Indicator