Aroon

Definition¶

The Aroon helps traders identify trends and potential reversals in the market. The Aroon consists of two lines, the Aroon Up and the Aroon Down, that measure the duration between the most recent highs and lows within a specified period.

MobileDesktop

History¶

Tushar Chande, a well-known trader and author with a strong background in technical analysis and quantitative methods, developed the Aroon in 1995 to create effective tools for technical analysis. Chande introduced the Aroon in his book ‘The New Technical Trader’ where he sought to provide traders with tools to identify trends and reversals more effectively.

Calculations¶

The Aroon is calculated based on two lines:

\[ Aroon\ Up = { { { n - Periods\ since\ High\ within\ n } \over n } \times 100 } \]

\[ Aroon\ Down = { { { n- Periods\ since\ Low\ within\ n } \over n } \times 100 } \]

\(Periods\) \(since\) \(High\) \(within\) \(n\) – the number of periods since the highest price within the lookback period

\(Periods\) \(since\) \(Low\) \(within\) \(n\) – the number of periods since the lowest price within the lookback period

\(n\) – the lookback period

Interpretation¶

By default, the Aroon is calculated with a 25-period lookback.

The main patterns of the indicator behaviour can be interpreted as follows:

• Zero-line crossovers. When the indicator crosses above the zero line, it suggests a potential bullish trend, signalling rising momentum. Conversely, a cross below zero indicates a shift towards bearish momentum, highlighting increasing selling pressure.

• Divergence. Divergences between the indicator and price movement can signal potential reversals. Bullish divergence occurs when prices make lower lows while the indicator makes higher lows, suggesting weakening downward momentum. Bearish divergence, on the other hand, occurs when prices make higher highs while the indicator makes lower highs, indicating potential selling pressure ahead.

• Breakouts. A sudden increase in the indicator reading may indicate a breakout from a previous range, suggesting a new trend direction. This can serve as a cue for traders to watch for further confirmation before acting on a breakout signal.

Application¶

• Buy signal. Traders may consider entering a buy position when the Aroon Up crosses above the Aroon Down, suggesting the start of a bullish trend.

• Sell signal. A sell signal might be generated when the Aroon Down crosses above the Aroon Up, indicating the beginning of a bearish trend.

• Stop-loss placement. Traders might use the Aroon Indicator to place stop-loss orders. In a long position, a stop-loss could be placed below the most recent low or a crossover point between the Aroon Up and the Aroon Down, while in a short position, a stop-loss might be placed above the most recent high.

• Exit strategies. If the Aroon Up or the Aroon Down begins to decline from the 70-100 range, it might indicate a weakening trend. Traders could consider exiting positions as the trend starts losing strength.

Limitations¶

The Aroon may produce delayed signals, especially in fast-moving markets. It is also sensitive to the period length chosen. Moreover, the Aroon indicator offers limited insight into market strength or volatility.

Summary¶

The Aroon is used to identify trends and potential reversals by measuring the time since the last significant high and low within a specified period. It consists of two lines – the Aroon Up and the Aroon Down – ranging from 0 to 100, with values above 70 indicating strong trends. Traders use the Aroon to assess trend strength and detect potential reversals.