The Aroon indicator, designed by Tushar Chande, is a trend-following indicator that is similar in appearance to the DMI.
Click here to see Aroon indicators inside a real time trading platform.
However, it is calculated using a different method. It comprises two lines, the Aroon-Up and the Aroon-Down. Both lines are displayed in one indicator which combines two datasets, namely time and price. The Aroon-Up indicates over a given period how much time has passed from the point at which a new highest price was reached to the starting point of the reference period.
If a new highest price is reached within the period under consideration, the Aroon-Up equals 100%. If this highest price is not exceeded during the selected period, then the Aroon-Up falls to 0%. The 100% and 0% values logically form the indicator’s lower and upper limits. The Aroon-Down works in precisely the opposite way with the lowest price.
As long as the Aroon-Up stays above the Aroon-Down, this is seen as a positive signal. An Aroon-Down above an Aroon-Up is a negative signal. Buy-sell signals are generated at the crossings.
The Aroon only works well in trend markets and is not suitable for sideways movements. The Aroon often provides well-timed signals in trend markets. It generates fewer false signals in sideways markets than the DMI.
- Aroon period (14)
BUY AND SELL SIGNALS
Are found at the Aroon-up and Aroon-Down crossing
This example shows the Aroon indicator in a 15-minute chart using the NanoTrader trading platform. The parameters were defined with 14 periods and the signal line at 90. When the Aroon-Down is above the Aroon-Up a sell signal is generated, when the Aroon-Up is above the Aroon-Down a buy signal is generated. If the value > 90 is reached, the signal is recognised. As long as the value remains above 90, the positive/negative moods are confirmed. If the Aroon lines fall below < 90, this is a signal to close the respective long/short positions.