Forex

Aroon Indicator

In 1995 the Aroon indicator was developed by Tushar Chande. It used to measure the trend strength to determine the continuance or vanishing of the trend. That’s why the Aroon indicator should be one of your trend arsenal indicators.

The Aroon indicator consists of two lines:

AroonUp:

The first line in the Aroon indicator is the AroonUp line (Red line in figure 1), this line is calculated by determining how much time elapsed from the highest closing price during the calculated period.
This value is multiplied by 100 give us a line that ranges from 0 to 100.

This is the formula of AroonUp line:

AroonUp(n) = 100 + (100/Period) * (n-Highest(Price High,Period,n))

Where:

n: the bar of calculation.
Period: the used period of calculation.
Highest: function that returns the maximum value over a specific number of periods depending on type.
Price High: The High value of the price bar.

AroonDown:

The second line in the Aroon indicator is the AroonDown line (Blue line in figure 1), this line is calculated by determining how much time elapsed from the lowest closing price during the calculated period.
This value is multiplied by 100 give us a line that ranges from 0 to 100.

This is the formula of AroonDown line:

AroonDown(n) = 100 + (100/Period) * (n-Lowest(Price Low,Period,n))

Where:

n: the bar of calculation.
Period: the used period of calculation.
Lowest: function that returns the least value over a specific number of periods depending on type.
Price Low: The Low value of the price bar.

Aroon Oscillator:

We will know in the section of how to trade using the Aroon indicator that there is an importance of the crossing of the AroonUp and AroonDown lines, for that a variation of the Aroon indicator developed as an oscillator.

The Aroon Oscillator is calculated by subtracting the AroonDown value from the AroonUp value:

Aroon Oscillator = AroonUp - AroonDown.

That will produce an oscillator that oscillate between -100 and 100 (Figure 2) .

How to trade using Aroon indicator?

There are three significant levels that we use when we trade with Aroon indicator; 30, 70 and 100 levels:

1- When the AroonUp line reaches the 100 level it’s a sign of uptrend strength, the closer it remains to the top the stronger the trend.

2- When the AroonUp line falters between 70 and 100 levels it’s a sign of potential uptrend, this sign is stronger when the AroonDown falters between 0 and 30 levels.

3- When the AroonUp line falters between 0 and 30 levels it’s a sign of trend weakness and potential reversal may occur.

4- Conversely, when the AroonDown line reaches the 100 level it’s a sign of downtrend strength, the closer it remains to the top the stronger the trend.

5- When the AroonDown line falters between 70 and 100 levels it’s a sign of potential downtrend, this sign is stronger when the AroonUp falters between 0 and 30 levels.

6- When the AroonDown line falters between 0 and 30 levels it’s a sign of trend weakness and potential reversal may occur.

7- When the AroonUp line crosses upward the AroonDown line it’s a sign of bullish signal.

8- When the AroonDown crosses downward the AroonDown line it’s a sign of bearish signal.

9- When the AroonUp and AroonDown move parallel with each other it’s a sign of consolidation and it’s the time to wait a crossover or extreme level contact from one of the Aroon lines.