Aroon Indicator: Definition, Formula, Signals

The Aroon Indicator is a powerful tool for identifying trends and potential trend reversals in the financial markets. Incorporate it into their trading strategies to make more informed decisions.

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1/5/20244 min read

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The Aroon Indicator is a technical analysis tool that helps traders identify trends and potential trend reversals in the financial markets. It was developed by Tushar Chande in 1995 and is widely used by traders and investors to make informed decisions.

Aroon Indicator: Definition

The Aroon Indicator measures the strength and duration of a trend by calculating the time it takes for the price to reach its highest and lowest points within a given period. It consists of two lines: the Aroon Up line, which measures the number of periods since the highest high, and the Aroon Down line, which measures the number of periods since the lowest low.

The Aroon Indicator ranges between 0 and 100. A reading of 100 indicates that a new high or low has been reached within the specified period, while a reading of 0 suggests that the high or low has not been reached during that time.

Aroon Indicator: Formula

The Aroon Indicator is calculated using the following formula:

Aroon Up = ((Number of periods - Number of periods since highest high) / Number of periods) x 100

Aroon Down = ((Number of periods - Number of periods since lowest low) / Number of periods) x 100

The Aroon Indicator can be calculated for any given period, such as 14 days, 30 days, or any other timeframe that suits the trader's preference.

Aroon Indicator: Signals

The Aroon Indicator generates two main signals: the Aroon Up crossing above the Aroon Down line, and the Aroon Down crossing above the Aroon Up line.

When the Aroon Up line crosses above the Aroon Down line, it indicates a bullish signal, suggesting that the price is likely to continue rising. Conversely, when the Aroon Down line crosses above the Aroon Up line, it indicates a bearish signal, suggesting that the price is likely to continue falling.

Traders often look for confirmation from other technical indicators or chart patterns before making trading decisions based solely on the Aroon Indicator signals.

How to Use the Aroon Indicator with Other Indicators

The Aroon Indicator can be used in conjunction with other technical indicators to increase the probability of accurate trading signals. Here are a few examples:

1. Moving Averages

Combining the Aroon Indicator with moving averages can help traders identify the strength and direction of a trend. When the Aroon Up line is above the Aroon Down line and the price is above the moving average, it confirms a bullish trend. Conversely, when the Aroon Down line is above the Aroon Up line and the price is below the moving average, it confirms a bearish trend.

2. Relative Strength Index (RSI)

The Aroon Indicator can be used in conjunction with the RSI to identify overbought and oversold conditions. When the Aroon Up line crosses above the Aroon Down line and the RSI is below 30, it suggests a potential bullish reversal. On the other hand, when the Aroon Down line crosses above the Aroon Up line and the RSI is above 70, it suggests a potential bearish reversal.

3. Bollinger Bands

Combining the Aroon Indicator with Bollinger Bands can help traders identify potential breakouts.

When the Aroon Up line crosses above the Aroon Down line and the price is trading near the lower Bollinger Band, it suggests a potential bullish breakout. Conversely, when the Aroon Down line crosses above the Aroon Up line and the price is trading near the upper Bollinger Band, it suggests a potential bearish breakout.

Aroon Indicator: A Brief Biography of Tushar Chande

Tushar Chande, the creator of the Aroon Indicator, is a renowned technical analyst and author. He has made significant contributions to the field of technical analysis and has developed several other popular indicators, such as the Chande Momentum Oscillator (CMO) and the Stochastic RSI.

Chande holds a Ph.D. in mechanical engineering and has worked as a consultant for various financial institutions. He has written several books on technical analysis, including "Beyond Technical Analysis" and "The New Technical Trader," which have become valuable resources for traders and investors worldwide.

Chande's innovative approach to technical analysis has earned him recognition and respect in the trading community. His indicators, including the Aroon Indicator, continue to be widely used by traders to this day.

Conclusion

The Aroon Indicator is a powerful tool for identifying trends and potential trend reversals in the financial markets. By understanding its definition, formula, and signals, traders can incorporate it into their trading strategies to make more informed decisions.

Furthermore, combining the Aroon Indicator with other technical indicators can enhance its effectiveness and provide traders with a comprehensive view of the market. The Aroon Indicator, when used in conjunction with moving averages, RSI, and Bollinger Bands, can help traders identify trends, overbought/oversold conditions, and potential breakouts.

As traders continue to explore and refine their trading strategies, the Aroon Indicator remains a valuable tool in their technical analysis toolkit.