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.
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 –
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 –
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.
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 –
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 –
Also Read: Parabolic SAR Explained
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.
The advantages of the indicator are as follows –
Though useful, the indicator has its share of disadvantages too. These include the following –
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.
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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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.
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