OVERVIEW
The Aroon indicator anticipates when a security is changing from an impulsive move to a trading range and vice versa. The Aroon indicator was developed by Tushar Chande, who also created the Chande Momentum Oscillator and the Qstick. The aroon indicator displays two plots: (1) Aroon Up and (2) Aroon Down. The standard period for the Aroon Up and Aroon Down is 25-periods
roon indicator is used to define if a currency trading price is following a trend or sideways and to measure the trend’s strength. If the currency’s trading price is going up, the end for this period will be closer, and on the contrary. The Aroon indicator shows in percents how much time passed between the up (highest) and down (lowest) close starting from the beginning of a period. When “Aroon up” and “Aroon down” are moving simultaneously, there is no clear trend. Then the price is moving sideways, or is going to move sideways. When the “Aroon down” is less than 50 it is a sign that the downtrend is giving up its momentum, while when the Aroon (up) is less than 50, it is a sign that the uptrend is giving up its momentum. When the “Aroon up” or “Aroon down” are more than 70, it demonstrates a strong trend in the same direction, while when the value is less than 30; it means a trend going in an opposite direction.
And last but not least, for the Aroon Oscillator, the positive value shows a coming or an upward trend, and the negative value indicates a downward trend. When the absolute value of an oscillator becomes higher, an indication of a trend is also getting stronger.
There are some very basic rules that traders can use by analyzing the relationship between the Aroon Up and Aroon Down. There are three basic rules: (1) extreme readings, (2) parallel movement between Aroon Up and Aroon Down, and (3) crossovers between Aroon Up and Aroon Down.
How to calculate the indicator?
The formula consisting of two lines – “Aroon up” and “Aroon down” is used for calculating Aroon indicator. The Aroon Oscillator got in the result is the distinction between them. “Aroon up” is a sum number of periods – number of periods since highest close / sum number of periods x 100 “Aroon down” = sum number of periods – number of periods since lowest close / total number of periods x 100 Aroon oscillator = “Aroon up” – “Aroon down”.The below chart is from the recent debacle in Citgroup. Notice how the Aroon Down stayed between 100 and 70 for over three months, while the stock experienced a 50% decline.
