Definition and Use of the Aroon Indicator
The Aroon indicator was developed by Tushar Chande in 1995. Tushar chose this name because the indicators are supposed to reveal the start of a new trend. The Aroon indicator is similar to other momentum oscillators in terms of when the market enters a trend. It becomes more effective in confirming signals or conditions identified by additional technical analysis.
Calculation of Aroon Indicators
Calculating Aroon metrics is not as complicated as you might think. It simply requires that the high and low prices of an asset be tracked for the number of periods used in the formula. As mentioned above, almost all of the 25 periods of use are recommended by Tushar Chande.
Track the ups and downs in the asset price over the last 25 time periods.
Note how long it has been since the last high and low.
Use these numbers in the Aroon-Up and Aroon-Down formulas below.
Aroon-Up = ((25 days from 25-day max) / 25) x 100
Aroon-Down = ((25 days from 25-day low) / 25) x 100
What Does the Aroon Indicator Tell You?
The Aroon Up and Aroon Down lines fluctuate between zero and 100, with values near 100 indicating a strong trend and values near zero indicating a weak trend. Therefore, an Aroon Up value above 50 means that the price has reached a new high in the last 12.5 periods. A value close to 100 means that it only recently peaked. The same concepts apply to Down Aroon. If it is above 50, a period low of 12.5 has been observed. A drop of almost 100 means that it recently hit a low. Crossings can mark entry or exit points. The Up over Down crossover can be a buy signal. A cross below the high can be a sell signal. If both indicators are below 50, it may indicate that the price is consolidating. No new highs or lows are created.
Advantages and Disadvantages
Easy to understand: interpreting lines can be relatively straightforward and does not require complex mathematical expressions.
Effectively signal trend reversals - Line crossovers can signal traders to increase or decrease momentum.
Flexibility in the choice of the interval: traders can change the length of the calculation period of the Aroon lines according to their trading frequency.
Leakage Indicator - Aroon lines are based on historical prices, thus lagging behind the underlying trend.
Influenced more by time than price movements - Since it only depends on the age of the last high/low, the indicator does not provide any information on the extent of the possible change.
Must be used in conjunction with other indicators - independently, the signals provided may not always be accurate and it is always best to use them in conjunction with other indicators.