Aroon Indicator Study
By Samantha Baltodano
TL;DR:
The Aroon indicator is a technical analysis tool used to identify trend changes and the strength of those trends in a security's price. It consists of two lines: Aroon Up, which measures the strength of an uptrend, and Aroon Down, which measures the strength of a downtrend.
The indicator ranges between 0 and 100, with values close to 100 indicating a strong trend and values close to zero indicating a weak trend. The indicator is calculated by tracking the high and low prices over the last 25 periods, and it can signal entry or exit points when the lines cross.
What Is The Aroon Indicator Study?
The Aroon indicator is a technical indicator that is used to identify trend changes in the price of a security and the strength of that trend.
In essence, the indicator measures the time between highs and the time between lows over a given time period.
The idea is that strong uptrends will regularly see new highs, and strong downtrends will regularly see new lows. The indicator signals when this is happening, and when it isn't.
The indicator consists of the "Aroon up" line, which measures the strength of the uptrend, and the "Aroon down" line, which measures the strength of the downtrend.
Calculation
The Aroon Up and Down lines are calculated as follows:
- Aroon Up = (25 − Periods Since 25 period High / 25) *100
- Aroon Down = (25 − Periods Since 25 period Low / 25) * 100
The Aroon calculation requires the tracking of the high and low prices, typically over 25 periods.
- Track the highs and lows for the last 25 periods on an asset.
- Note the number of periods since the last high and low.
- Plug these numbers into the Up and Down Aroon formulas.
What Does the Aroon Indicator Tell You?
The Aroon Up and the Aroon Down lines fluctuate between zero and 100, with values close to 100 indicating a strong trend and values near zero indicating a weak trend.
The lower the Aroon Up, the weaker the uptrend and the stronger the downtrend, and vice versa. The main assumption underlying this indicator is that a stock's price will close regularly at new highs during an uptrend, and regularly make new lows in a downtrend.
The indicator focuses on the last 25 periods, but is scaled to zero and 100. Therefore, an Aroon Up reading above 50 means the price made a new high within the last 12.5 periods. A reading near 100 means a high was seen very recently.
The same concepts apply to the Down Aroon. When it is above 50, a low was witnessed within the 12.5 periods. A Down reading near 100 means a low was seen very recently.
Crossovers can signal entry or exit points. Up crossing above Down can be a signal to buy. Down crossing below Up may be a signal to sell.
When both indicators are below 50 it can signal that the price is consolidating. New highs or lows are not being created.
Traders can watch for breakouts as well as the next Aroon crossover to signal which direction price is going.
Example of How to Use the Aroon Indicator
The following chart shows an example of the Aroon indicator and how it can be interpreted.
In the chart above, there is both the Aroon indicator and an oscillator that combines both lines into a single reading of between 100 and -100.
The crossover of the Aroon Up and Aroon Down indicated a reversal in the trend.
While the index was trending, prior to the reversal, the Aroon Down remained very low, suggesting that the index had a bullish bias.
Despite the rally on the far right, the Aroon indicator hasn't shown a bullish bias yet. This is because the price rebounded so quickly that it hasn't made a new high in the last 25 periods (at the time of the screenshot), despite the rally.
Test The Aroon Indicator Study
Great news!
You can back test this exact strategy on historical data for any of your favorite symbols using TradingView.
This strategy has already been built and all you have to do is log in and take it for a spin. You can access this indicator here.
If you’re new to back testing and to TradingView, don’t worry. I created a step-by-step guide you can follow to begin testing the Aroon Indicator Study.
Summary
- The Aroon indicator is composed of two lines. An up line which measures the number of periods since a High, and a down line which measures the number of periods since a Low.
- The indicator is typically applied to 25 periods of data, so the indicator is showing how many periods it has been since a 25-period high or low.
- When the Aroon Up is above the Aroon Down, it indicates bullish price behavior.
- When the Aroon Down is above the Aroon Up, it signals bearish price behavior.
- Crossovers of the two lines can signal trend changes. For example, when Aroon Up crosses above Aroon Down it may mean a new uptrend is starting.
- The indicator moves between zero and 100. A reading above 50 means that a high/low (whichever line is above 50) was seen within the last 12 periods.
- A reading below 50 means that the high/low was seen within the 13 periods.
Aroon Indicator is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.
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