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.
Also Read: What Is Relative Strength Index (RSI) in Stock Market and How to Calculate it?
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.
Not familiar or interested in trading? Invest in mutual funds! Navi Mutual Fund offers a wide range of low-cost index funds including the Navi Nifty 50, Navi Nifty Next 50, and Navi US Total Stock Market Fund of Fund, among others. We have funds for every investor. Download the Navi app, select the fund of your choice and start investing! You can start with as low as Rs.10.
Disclaimer: Mutual fund investments are subject to market risks, read all scheme-related documents carefully.
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.
Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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.
National Pension Scheme (NPS) – How to Open NPS Account?National Pension Scheme or NPS is a voluntary contribution-based retirement benefits scheme introdu... Read More »
Senior Citizen Savings Scheme (SCSS) – Interest Rate 2023The Senior Citizen Savings Scheme is a government savings scheme launched for the senior citizens o... Read More »
Mahila Samman Saving Certificate Scheme – Meaning, Eligibility, Features and Interest RateIf you're a woman looking for a secure investment option, the Mahila Samman Saving Certificate migh... Read More »
List of GST State Codes and Jurisdiction 2023What is the GST State Code? GST state code is the first two digits of the number on the GS... Read More »
Open PPF Account Online and Offline – Features, Documents Required and BenefitsPPF (full form: Public Provident Fund) is a government backed long-term savings scheme that comes w... Read More »
How to Invest in the Share Market in 2023 – A Beginner’s GuideA share market is a platform where buyers and sellers trade shares of publicly-listed companies. Co... Read More »
What is Management Buyout (MBO) – Process and ExampleA management buyout means a type of business acquisition where a business is acquired from its exis... Read More »
What are Indian Government Bonds – Types and Interest RatesGovernment bonds in India are debt securities issued by the government of India to finance its fisc... Read More »
Bad Debt – Provision, Example and How to Calculate It?Bad debt is the amount of debt that cannot be recovered as the customer is unable to repay it. Ther... Read More »
PPF Account for Minors – Eligibility, Taxation and How to Open?A Public Provident Fund or PPF account can easily be opened for minors with a deposit of just ₹10... Read More »
PPF Withdrawal Rules – Rules, Process and Tax ImplicationPPF Withdrawal Rules The table given below will explain the PPF account withdrawal rules along w... Read More »
Debt Service Coverage Ratio (DSCR) – Formula and CalculationDebt Service Coverage Ratio or DSCR is a measurement of a firm’s short-term financial health. It ... Read More »
Top 10 Chit Fund Schemes in India in 2023Chit funds are one of the most popular return-generating saving schemes in India. It is a financial... Read More »
10 Best Gold ETFs in India to Invest in March 2023Gold ETFs or Gold Exchange Traded Funds are passively managed funds that track the price of physica... Read More »
10 Best Demat Accounts in India for Beginners in 2023Creation of Demat accounts revolutionised the way trades were conducted at the stock exchanges.&nbs... Read More »
20 Best Index Funds to Invest in India in March 2023What is an Index Fund? An index fund is a type of mutual fund or exchange-traded fund (ETF) that... Read More »
Best Arbitrage Mutual Funds to Invest in India in March 2023Arbitrage funds are hybrid mutual fund schemes that aim to make low-risk profits by buying and sell... Read More »
10 Best SIP Plans in India to Invest in March 2023What is SIP? SIP or Systematic Investment Plan is a method of investing a fixed amount in ... Read More »
10 Best Corporate Bond Funds in India to Invest in March 2023Corporate bond funds are debt funds that invest at least 80% of the investment corpus in companies ... Read More »
10 Best Bank for Savings Account in India 2023 – With Interest RatesSavings account is a type of financial instrument offered by several banks. It lets you safely depo... Read More »