The Aroon indicator, developed by Tushar Chande in 1995, actually consists of two indicators that together are designed to:- Identify trend changes or the beginning of a trend
- Identify the existence of a trending or ranging market
- Spot corrective retracements or consolidation periods
- Gauge the strength of a trend
The Aroon indicators take rather an inverse stance as compared to the usual momentum oscillators, as the Aroon focus is more on time relative to price rather than price relative to time.
Calculating Aroon Indicators
The Aroon Indicators are plotted with values ranging from 0 to 100.The Aroon-Up indicator is calculated as follows:
25 – Number of Days Since Recent 25-day High / 25
The Aroon-Down indicator is calculated as follows:25 – Number of Days Since Recent 25-day Low / 25
The results of both calculations are then multiplied by 100 to yield a percentage number.The chart shows the different modes of the market and how the Aroon indicator reacts to these different market modes:
Understanding what the Aroon Indicator Shows
When the Aroon Down indicator (in red above) is above the 70 line and the Aroon Up indicator (in greed above) is below 30, then the market is trending downwards.In contrast, when the Aroon Up indicator is above the 70 line and the Aroon Down indicator is below 30, then the market is trending strongly upwards.
When the Aroon Up and Aroon Down indicator move towards the center-line (50), then the market is entering into a consolidation period.
By varying the period length, the Aroon indicator can give long term indications of trend or short-term indications of trend. By default, the Aroon indicator is 25-periods (shown in the chart above), but a shorter time frame could be 10-periods.
The Single Line Aroon Indicator
Some versions of the Aroon combine the two indicators into a single Aroon indicator that, like other oscillators, has values ranging from -100 to +100. In the single indicator version of the Aroon, values around the middle zero line indicate the absence of a trend, a market that is ranging or in a consolidation phase prior to forming a trend. Values above +50 indicate a bullish trend and values below -50 indicate a bearish trend. The single version of the Aroon is shown in the chart below. Dark blue rectangular boxes are drawn around the Aroon indicator line to show where it reaches levels either above +50 or below -50. Note how price action, either staying above or falling below the uppermost trendline drawn in the main chart window confirms the change in direction indicated by the Aroon indicator. Also note the additional confirmation of a trend change that comes from the extremely high volume levels (shown at the bottom of the main chart window) that occur at the peak of the uptrend and the beginning of the sell-off. The dotted line in the middle of the Aroon indicator window is the zero line.
Aroon Oscillator
The Aroon Oscillator is calculated by subtracting Aroon Down from the Aroon Up indicator. It is interpreted as follows:- Above 50 is considered a strong up-trending market
- Below -50 means that the market is trending lower;
- Near 0 means that the market is in transition and not trending.
A decrease of the Aroon Oscillator from above the 50 line shows that the uptrend is consolidating and is reversing direction downward. When the Aroon Oscillator hovers around the zero line over time, then the market is in a directionless period.
When the oscillator moves toward -50 from the zero line, the market is beginning to trend downward. And when the Aroon Oscillator is below -50, then the market is in a strong downtrend.
When the oscillator begins to move upward towards the zero line, the downward trend is slowing down and beginning to reverse direction.
In addition, when the Aroon Oscillator moves higher from the zero line, then the market is moving from a period of non-trending to a period of up-trending.
The Aroon indicator and Aroon Oscillator are extremely helpful tools for a trader to have and use; the Aroon indicator helps traders to determine when best to apply trending following indicators like Moving Averages (see: Moving Averages) and when best to use oscillator type technical indicators like Stochastic.
