Aroon indicator was elaborated by a famous Forex trader Tushar S. Chande in 1995. This economic indicator allows to forecast changes in prices, direction and force of a trend. This figure is used to determine if Forex trend fades and to forecast its further change or continuation.
Aroon indicator is represented by two color lines.
AroonUp — shows a number of transitions from the moment of occurrence of intraday maximum.
AroonDown - shows a number of transitions from the moment of occurrence of intraday minimum.
AroonUp — is the red line, AroonDown — is the dark-blue line, both are measured within the range from 0 to 100. For Aroon indicator there are 4 important levels: 0, 30, 70 and 100. Periods set for Aroon indicator are usually 25 or 14. It can be substituted for 10 and 50 respectively for a short-term trading.
AroonUp = ((amount of periods - number of periods from highest point) / number of periods) * 100%
AroonDown = (( amount of periods - number of periods from lowest point) / number of periods) * 100%
Indicator is based on following signals:
If AroonUp crosses AroonDown from bottom to top — it is a bullish signal;
If AroonUp crosses AroonDown from top to bottom - it is a bearish signal;
And if AroonUp and AroonDown are parallel to each other – this is a consolidation period.
Rules of AroonUp:
- AroonUp crosses level 100 — it means a strong ascending tendency and the closer it to the top, the stronger it is
- AroonUp is located between 70 and 100 levels – it means a potential ascending trend. Signal is considered to be stronger if this time AroonDown is located between 0 and 30 points.
- AroonUp is located between 0 and 30 points — it says about a weak trend and possible reversal of the future trend.
Rules of AroonDown:
- AroonDown crosses the level of 100 – it says about a strong descending tendency and the closer it to the top, the stronger a trend is
- AroonDown is located between the levels of 70 and 100 – it is a potential descending trend. The signal is considered stronger under AroonUp being between 0 and 30 levels
- Location of AroonDown between 0 and 30 says about a weak trend and a possibility of reversal of the future trend
Advantages of Aroon Indicator
- High reliability. Aroon indicator seldom shows wrong signals about condition of market;
- It allows not only determining force and direction of trend, but also shoes opportunities for reversal of a trend. It helps to recognize if a long-term trend stops or just takes a pause prior to start of movement.
- Ease of comprehension and interpretation of graphical figures.
Drawbacks of Aroon Indicator
Delay in rendering of sharp price positions. Because of this drawback, traders have to combine Aroon with other instruments to permanently monitor and analyze market.