Aroon Indicator

When an asset continually closes higher and lower over a set period the Aroon indicator tells you. We take a look at this helpful aid to your trading.

  1. Interpreting The Information

  2. Using the Aroon Indicator

  3. Conclusion

 

The Aroon indicator assists traders by helping them to see if a price is continually closing either higher or lower (on average, over a defined number of periods – otherwise known as trending) or if it’s exhibiting range-bound behavior. The indicator is divided into two parts called “Aroon up” and “Aroon down”, and they help to show where a new trend is starting, the size of, and if there are any changes from trending patterns to range-bound behavior (and the opposite).

  • “Aroon up” is worked out like this:

((number of periods) – (number of periods since highest high)) / (number of periods) x 100

This means it works out how long it’s been since the price hit its most recent high, showing this as a percentage.

  • “Aroon down” is worked out like this:

((number of periods) – (number of periods since lowest low)) / (number of periods) x 100

“Aroon down” works out the exact opposite, of course, meaning how long it’s been since the price hit its most recent low.

Interpreting The Information

The Aroon indicator is predicated on the belief that an asset or an index will close at new highs during an uptrend and new lows during a downtrend, which means that you can use it to help inform a trend-following approach. Aroon uses a zero to 100 scale, so the midway point is obviously 50.

If you set the period (for how many candles it takes into account) to 60 and the “Aroon up” is at 50, it’s telling you that the most recent high over the past 60 periods (as represented by the number of candles) was 30 periods ago.

If you set it to 60 and the “Aroon down” is at 75, it’s telling you that the most recent low was 15 periods ago.

Using the Aroon Indicator

It’s worth bearing in mind that the highs and lows that the indicator points to will only be for the duration of the defined period, so it will ignore any historical data outside of the timespan that the user selects.

Shortening it to 14 shows us that a significant amount of recent volatility points to a strong downtrend in comparison to the uptrend, which just means that for trend-followers, shorting the index might be a more favorable tactic than going long due to recent weakness. Naturally, this isn’t a hard and fast conclusion, and each trader will of course prefer to come up with their own interpretation. 

But it is worth saying that the Aroon indicator will move around much more during a shorter period, where the lower amount of data means there’s a smaller range of possible values to work with. 

The ideal Aroon period for you will vary according to the style of your trading, but as a general rule of thumb, day traders will want to set a shorter period while those with an eye to the longer term will do the opposite. Day traders might also want to look to the long-term though so that they can keep a weather-eye on trends.

A period of 200 like in the illustration below would suit a longer-term trader whose positions might be in the order of months or even years. For the S&P 500 over this duration, the Aroon but points to a clear uptrend, prompting a trend follower with a technical analysis approach to favor long trades because they’re expecting a further increase over time.

Conclusion

The Aroon indicator isn’t so different from a moving average, but it’s especially concerned with homing in on the period after the most recent high or low. Followers of a trend-following approach find this particularly useful. 

How you use the Aroon comes down to what kind of period you trade over or to give you better insight into the overall trend. It’s good for examining shorter periods but don’t go below the 8 to 10 range because this generates more noise.

Day traders can also use the Aroon to keep tabs on longer-term trends, so a day trader using a 5-minute chart on a 24-hour asset (which includes many commodities and foreign exchange who wants to use the Aroon to view the trend over the previous day could set the period at 288, which equates to the number of five-minute periods over the last 24 hours in which the asset traded.