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Aroon Up and Down

Aroon Up and Down Article Cover - Official Olymp Trade Blog

The Aroon indicator was developed to identify market trends as well as the direction and strength of a price’s movement. Essentially, it shows how trends weaken or strengthen within a certain period.


 

Contents:

Interact with the underlined words and green dots to get additional details and explanations.

About the creator

The Aroon indicator was created by the famous US trader of Indian origin, Tushar Chande. Born in 1958, he became famous for his research in the field of technical analysis, during the course of which he developed many indicators. These were new and groundbreaking technical analysis tools at the time, and most of them are still widely used in trading today.

Chande has authored several books and scientific articles, is the owner of nine US patents, and is a professional trader and financial analyst. The trading systems and indicators he has developed and co-developed include VIDYA, Aroon and Adaptive Stochastic Oscillator. Working together with Stanley Kroll — another famous US trader and technical analysis tool developer — Chande also contributed to the development of the Stoch-RSI and Dynamic Momentum Index indicators.

One of the most famous books about market analysis authored by Chande is Beyond Technical Analysis.

Description

The Aroon indicator consists of two lines: the Aroon Up line, which is usually a blue or green line; and the Aroon Down line, normally red. Like with most oscillators, both lines move within a range from 0 to 100.

The Aroon Up line indicates the number of time periods that have passed since the maximum peak price in a given timeframe.

The Aroon Down line measures the number of time periods that have passed since the lowest drop in price in a given timeframe.

Here are the formulas.

Aroon up = (Number of periods — the number of periods since the absolute maximum in the given period) / number of periods × 100

Aroon down = (Number of periods — the number of periods since the absolute minimum in the given timeframe) / Number of periods × 100

Aroon indicator lines — Official Olymp Trade Blog
Fig. 1. Aroon indicator lines

The Aroon indicator’s key levels are usually identified as 70, 50 and 30. These boundaries being crossed is a potential signal about the market trend.

For example, if one of the indicator lines is constantly above the level of 70, and the second keeps staying below 30 or near zero, then there is a strong trend in the market. Alternatively, if there is an uptrend in the market, the Aroon Up line will always be in the 100 range when following a corresponding candlestick chart, as the trend updates the maximum peaks so quickly that each new candle is a new peak value.

Indicator levels

If the indicator lines cross, that may signal the beginning of a new trend or the end of a flat market phase. The following table explains the relative importance and significance of each indicator level.

Indicator lineLevelMeaning
Aroon Up>70Strong uptrend
Aroon Up50 to 70Uptrend is gaining momentum
Aroon Up30 to 50Uptrend is continuing but losing momentum
Aroon Up<30Buyers no longer dominate the market
Aroon Down>70Strong downtrend
Aroon Down50 to 70Downtrend is forming
Aroon Down30 to 50Downtrend is losing momentum
Aroon Down<30Sellers no longer dominate the market

The default value of the indicator is 14, reflecting the timeframe being analyzed. If you increase it, the indicator will be set to identify larger trends. A larger value that is commonly used is 25. Traders need to find the optimal indicator value for themselves after analyzing their trade history and trying various other indicator values in trading.

Setting the indicator value to 30 helps identify and trade on larger trends, but the smaller ones will not be detected.

Indicator signals

1️⃣ First type

Aroon indicator first-type signal shows the extreme values reached by the asset price. In this case, the indicator lines are located on opposing ends of the indicator window and reflect the prevailing uptrend or downtrend.

If Aroon Up is above 70 and Aroon Down is below 30, that is a signal of an uptrend.

If Aroon Up is below 30 and Aroon Down is above 70, that is a signal of a downtrend.

Aroon Indicator first-type signal — Official Olymp Trade Blog
Fig. 2. Aroon indicator first-type signal

If Aroon Up crosses the 50 level, that means the uptrend is facing resistance and may reverse downward.

2️⃣ Second type

The second-type signal of the Aroon indicator is when its lines are parallel. It indicates that the current market trend is gaining momentum and strengthening.

Aroon Indicator second-type signal — Official Olymp Trade Blog
Fig. 3. Aroon indicator second-type signal

3️⃣ Third type

The third-type signal is when the Aroon indicator lines cross. It indicates that the market is in a long-term trend. This usually occurs when the Aroon Down goes upward, or the Aroon Up goes downward. The main factor determining the third signal is that the indicator lines are between the level of 30 and 70.

Aroon Indicator third-type signal — Official Olymp Trade Blog
Fig. 4. Aroon indicator third-type signal

Conclusion

The main characteristic of the Aroon indicator is that it helps identify the direction of market trends and their strength. That is a decent combination. On top of that, the Aroon indicator is useful in identifying the end of flat market phases and can be comfortably added to any trading strategy. In the meantime, just like with any other technical tool, it is advisable to use it together with other indicators to increase efficiency.

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