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Aroon indicator: learn how it works and how to use them in trading
There are many technical analysis indicators, but not all of them will work for you at all times. Knowing how to choose the right one will be the best for you, so you can study them all. This time we want to show you what the Aroon Indicator is and how you can use them in your next trading.
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What is the Aroon indicator?
At a glance, the Aroon indicator allows you to detect market trends (both upward and downward). But also experienced traders can see and know the market reversals.
The Aroon indicator consists of two lines: Aroon Up and Aroon Down. Generally, this indicator is calculated on the basis of 14 periods, which are usually days, to determine the up and down lines. Although 14 is the default value, it is possible to adjust the number of periods to a higher value, such as 25, depending on the trader's preferences.
The Aroon Up line indicates how many periods since the start of the evaluation window the highest value occurred, while the Aroon Down line indicates how many periods since the start of the window the lowest value was observed.
Developed by Tushar Chande in 1995, the name Aroon means “dawn” in Sanskrit. The indicator is intended to identify the beginning of a trend or a possible trend change, reflecting its essence of signaling market transitions.
How is the Aroon indicator calculated?
The Aroon indicator is calculated using the following formula for the two main lines: Aroon Up and Aroon Down.
- Aroon Up:
- Aroon Up = ((Number of periods - Number of periods since the last high) / Number of periods) * 100.
- Aroon Down:
- Aroon Down = ((Number of periods - Number of periods since the last lowest low) / Number of periods) * 100.
Where:
- Number of periods: This is the number of periods taken into account to calculate the indicator (e.g. 14 periods).
- Number of periods since the last highest maximum: Represents how many periods have elapsed since the highest maximum was identified within the established period.
- Number of periods since the last lowest low: Indicates how many periods have elapsed since the lowest low was identified within the set period.
After calculating the Aroon Up and Aroon Down, traders can interpret the information provided by the two lines to identify possible emerging trends or changes in market direction.
How to use the Aroon indicator?
When the Aroon Down line crosses the Aroon Up line, indicating a change in trend, as illustrated, it is a signal for traders to prepare for a possible change in price movement.
For example, in a situation where the Down line crossed above the Up line and reached 100%, after an uptrend, the price began to fall steadily, confirming Aroon's indication.
In addition, when both Aroon lines move together, as shown in another section of the chart, indicating a downtrend, this suggests a lack of clear direction in the price. This behavior usually occurs during periods of consolidation, when the price remains stable.
Traders can use the Aroon lines to identify potential buying or selling opportunities. For example, if the bullish Aroon is above 50% and the bearish Aroon is below 50%, this could indicate an uptrend. When the two lines are close together, with no clear divergence, this suggests the lack of a definite trend.
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What are the advantages and disadvantages of the Aroon indicator?
As with many technical analysis indicators, its use depends mostly on timing. For that reason, there are some advantages and disadvantages to mention:
✅ Advantages:
- Identifying emerging trends: Aroon can help traders identify the start of a new trend in the market by providing early signals of changes in direction.
- It is very simple to use: the calculation of Aroon is simple and easy to understand, making it accessible even for novice traders.
- Customization: traders can adjust the number of periods used in Aroon's calculation to suit their trading strategies and time preferences.
- Complementing other indicators: Aroon can be used in conjunction with other technical indicators to confirm trading signals and increase the accuracy of analysis, such as the MACD indicator, RSI or trading triangles.
- Identification of trend changes: the crossing of the Aroon Up and Aroon Down lines can provide useful signals about possible trend changes.
Disadvantages ❌:
- Delayed signals: Like other technical analysis indicators, Aroon can provide signals that lag behind actual market changes, which can lead to losses if not used with other forms of confirmation or if real-time analysis is not done.
- False signals: In volatile markets or during periods of consolidation, Aroon may generate false signals due to its sensitivity to small price fluctuations.
- Limitations in trendingmarkets: In sideways markets or markets without a clear direction, Aroon may not provide useful signals, as the Aroon Up and Aroon Down lines may remain close to each other.
- Subjective interpretation: The interpretation of Aroon signals may vary among traders, which may lead to contradictory decisions and different results.
- Need for confirmation: To mitigate the disadvantages of Aroon, traders often combine its use with other technical analysis and risk management tools.
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