The Aroon indicator is mainly used to identify points at which the overall price trend of an asset is likely to change and the strength of a particular trend over a given time period.
The indicator tracks the strength of an existing downtrend or uptrend by measuring the distance between successive highs within an uptrend and successive lows in a downtrend.
The Aroon indicator is based on the idea that a strong uptrend will usually display a series of higher highs, while a strong bearish trend will have a series of lower lows.
The Aroon indicator is made up of the “Aroon up line” that tracks the highs made in an uptrend, and the “Aroon down line” that reflects the lows made in a downtrend.
How the Aroon indicator is calculated
The Aroon indicator values are tracked on a scale that is calibrated from 0 to 100. Readings above 50 typically indicate that a new high/low was recorded in the last 12 or fewer periods, while a reading below 50 typically indicates that a new low/high was last witnessed in the last 13 or more periods.
The Aroon indicator is usually applied to the last 25 periods, which is why Aroon values over 50 and below 50 refer to highs and lows in the last 12.5 periods.
The Aroon indicator is calculated by finding the values of the Aroon up line and the Aroon down line over a given 25-period block of time.
• Aroon up line = [(25 – period since 25 period high)/ 25] * 100
• Aroon down line = [(25 – periods since 25 period low)/ 25] * 100
The Aroon indicator is derived from the highs and lows recorded within a group of periods, with the default being 25 periods.
You can manually calculate the indicator by:
1. Recording the highs and lows of each period for the chosen number of periods.
2. Determining the number of periods that have passed since the last high or low was recorded.
3. Taking the figures generated in steps 1 and 2 and inserting them into the Aroon formulas.
How to use the Aroon indicator
The Aroon indicator is unique in the sense that the values of its up and down lines both oscillate between 0 and 100, with values near 100 indicating a strong uptrend or downtrend depending on the line that is displaying such values.
Whenever the Aroon up line is near 100, indicating a strong uptrend, the Aroon down line is usually near zero, indicating the absence of any type of downtrend. The opposite is also true; when the Aroon down line is near 100, the Aroon up line is usually at or near zero.
Therefore, you can use the Aroon indicator to gauge the strength of an existing trend using the above logic.
A reading of 50 or above on the Aroon up line usually indicates that a new high was hit within the last 12.5 periods, while a reading near 100 indicates that the high was reached recently. A reading of 50 and above on the down line has a similar meaning when it comes to recent lows.
Using Aroon crossovers as trade entry signals
You can use a crossover between the Aroon up and down lines as a trade entry or exit signal depending on the indicator’s previous action. For example, if the Aroon up line was near 100 for a period and starts moving lower, this indicates that the bullish trend is losing momentum and a new downtrend may be formed.
If the Aroon down line is rising at the same time, a short signal may be generated once the up line crosses below the down line. The opposite can happen when the Aroon down line starts falling while the Aroon up line is rising, which could trigger a buy signal if the Aroon up line crosses above the Aroon down line.
Beware of sudden price moves
The Aroon indicator can be late to reflect a sudden change in the price of an asset, especially a shift in the overall direction of price. For example, the indicator may not reflect a sudden rally in price, especially in cases where the previous trend was mostly bearish. The same is true for sudden price declines in a mostly bullish trend.