Aroon Indicator for Trend Analysis

Aroon Indicator for Trend Analysis

Posted: 02 Sep 2009 05:58 AM PDT

Aroon is a relatively new indicator developed by Tushar Chande in 1995, which is used to analyze the direction and strength of trends. Aroon, a Sanskrit word meaning ‘dawn’s early light,’ represents the long-term or short-term trend existing in a stock or currency and also predicts trend reversals. It is an indicator comprising two lines Aroon-Up line and Aroon-Down line. Aroon-Up line measures the amount of time (in percentage) since highest price during the time period and Aroon-Down line measures the amount of time (also in percentage) since lowest price during the time period.

Aroon-Up = (No. of Periods – No. of periods since highest price) x 100

No. of periods

Most traders use Aroon indicator for a range of 25 time periods; many others use 14 time periods. Aroon indicator is an easy to interpret indicator. There are four important values 0, 30, 70 and 100. Strong bullish trend is identified when Aroon-Up is at or near 100. Potential uptrends are indicated when the Aroon-Up line is fluctuating between 70 and 100 (and Aroon Down is between 0 and 30). You can expect a weak bullish trend when Aroon-Up is below 30. Similarly, a strong bearish trend is signified when Aroon-Down is at or near 100, potential downtrends when it is between 70 and 100, and weak bearish trend when it is below 30.

Crossovers are also important. Bullish signals are generated when Aroon-Up crosses Aroon-Down upwards and bearish signal when it crosses downwards. Consolidation of existing trend is indicated when both lines run parallel to each other. Many traders also combine Aroon Up and Down lines to make a single oscillator having values between 100 and -100. Remember Aroon indicator is a lagging indicator and offers better results when used with other indicators.