How To Use Aroon Indicator – Formula, Calculation And Strategy
The Aroon indicator is a technical indicator that measures the trend in an asset’s price along with its strength. Over a given period, the Aroon indicator measures the time in between the high price and low price of an asset.
The assumption behind the indicator is that in an uptrend, the asset’s price would constantly see new highs, while in a downtrend, the price would go to new lows. Based on this assumption, the Aroon indicator works.
Aroon Indicator Formula
The Aroon indicator has two specific lines – one up line and one down line. These lines together make up the indicator. The lines can be plotted by using the Aroon indicator formula. The formula is as follows –
- Aroon up line = {(25 – periods since 25-period high) / 25} * 100
- Aroon down line = {(25 – periods since 25-period high) / 25} * 100
Calculating the Aroon Indicator
Once you have calculated the Aroon up and down indicators, you can use them to calculate and plot the Aroon indicator. To calculate the Aroon up and down indicator, use the following steps –
- Calculate the highs and lows of the asset over the last 25 periods
- Check the number of periods between the last high or last low
- Use these numbers and enter them in the aforementioned Aroon indicator formula for the up and down lines.
Now draw the up and down lines, and the Aroon indicator will be formed. It would look like this –
The red line is the down line, while the green one is the up line.
How to Use the Aroon Indicator?
The Aroon Indicator can help you strategize your investments. You need to find the crossover between the Aroon up and down Indicators which would give you signal of a trend reversal.
These lines range from 0 to 100. The closer the line is to 100 the higher is the trend. It means that there is an uptrend in the asset’s price.
On the contrary, if the line is closer to zero, it signals a low trend. Also, the following points should be kept in mind –
- If the Aroon up line is low, it means that the uptrend is weak and the downtrend is strong. The opposite is true for the down line
- If the Aroon up line reads above 50, it means that the asset’s price touched new highs in the last 12.5 periods
- If the Aroon up line reads close to 100, the high price was reported recently
- If the Aroon down line reads over 50, it means that a low was recorded in the last 12.5 periods
- If it reads close to 100 it means that the low was recent
Moreover, when the Aroon up and down Indicators cross one another, a crossover happens which is a crucial signal of entering or exiting from the market. Here’s how to read such crossovers –
- If the Aroon up line intersects the Aroon down line from above, it is a signal to buy
- If the Aroon down line intersects the Aroon up line from below, it is a signal to sell
Also Read: Parabolic SAR Explained
Aroon Oscillator Trading Strategy
The Aroon Oscillator is a further extension of the Aroon Indicator. It is calculated as the difference between the up line and the down line. The oscillator ranges from 0% to 100%.
If the oscillator is close to 100%, you can be confident of the signals that the Aroon Indicator is giving. On the other hand, if the oscillator is near 0%, the signals from the indicator are less strong. So, while the Aroon Indicator gives us the trend, the oscillator measures the strength of the trend.
Advantages of Aroon Indicator
The advantages of the indicator are as follows –
- It is a simple indicator that you can read without too many technical complications
- The indicator effectively signals the trend changes from an uptrend to a downtrend and vice-versa
- When combined with other technical indicators, the Aroon Indicator can give you useful insights when trading on the stock exchange
- You can choose the time period per your requirement. There is no fixed time period for calculating the Aroon up and down Indicators
Disadvantages of Aroon Indicator
Though useful, the indicator has its share of disadvantages too. These include the following –
- It is a lagging indicator as it uses the historic prices of an asset. Thus, you would get the information of an uptrend or a downtrend when the trend has already started. This makes you miss out on the early trend opportunities
- The indicator measures the time between highs and lows. It does not indicate the quantum of high or low the price has changed
- It is more useful when used together with other indicators. In isolation, the Aroon Indicator might not give a very accurate signal
Difference Between the Aroon Indicator and the Directional Movement Index (DMI)
The Aroon Indicator and the Directional Movement Index (DMI) are kind of similar as both these indicators measure the trend in the price of an asset. However, the primary differentiating factor that the Aroon Indicator primarily measures is the time elapsed between the highs and lows in the price.
The DMI indicator measures the difference in prices between the current and previous highs and lows. Thus, the Aroon Indicator strategy measures time while the DMI indicator measures price.
Also Read: What Is Relative Strength Index (RSI) in Stock Market and How to Calculate it?
Final Word
The Aroon indicator is a useful technical indicator when you are trading in stocks. When you understand how the indicator works and how to read it, you can spot trend reversals and cash in on them.
Moreover, when combined with other technical indicators like the moving average indicator or the MACD, you get a better indication of market trends and can take the decision to enter or exit the market at the right time.
So, understand what the indicator is all about, how it works and figure out which Aroon trading strategy would be useful for you.
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FAQs
Ans. To read the Aroon lines, find the crossover between the two, the point where the up and the down line intersect. Depending on how they intersect, you can decipher them.
For example, if the up line moves above the down line from below, it means that there is a buying pressure. This leads to the development of a bullish trend as buyers become stronger than sellers. If the Aroon up line goes close to 100, the bullish trend is confirmed because the up line would reach 100 only when there is a new high.
If the up line remains between 70 and 100, the bullish trend would sustain. If the up line starts falling and crosses below the down line, the bull run would start losing momentum. The same concept, when applied to the down line, can signal bearish trends.
Ans. The Aroon Indicator was developed in 1995 by Tushar Chande.
Ans. The up and down lines of the indicator are lagging in nature. They do not catch the trend immediately after it starts.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
