- Aroon Indicator is a technical analysis tool that allows traders to identify changes in trends.
- Developed by Tushar Chande in 1995, the indicator helps the trader spot the early stages of a new trend.
Aroon Indicator Technical analysis helps traders form strategies to earn profits. But, often, they earn losses with emerging trends in the stock market. However, there are numerous indicators in technical analysis. But there is an indicator that helps identify a new trend.
It is the Aroon Indicator. The indicator helps traders navigate new trends or trading opportunities. It allows investors to anticipate changes in the trend regarding a particular stock. It does not only identify the trend, but it also determines how strong the trend is.
Understanding The Concept of Aroon Indicator
The term “Aroon” comes from the Sanskrit word Aruna,” meaning ‘Dawn’s Early Light.’ The name signifies its ability to spot the start of a new trend in the stock market. The indicator was created by Tushar Chande in 1995 with the purpose of identifying emerging trends in the financial market.
This technical analysis tool consists of two lines: ‘Aroon Up’ which measures the strength of the bullish trend, and ‘Arron Down,’ which measures the bearish trend strength. The indicator operates within a range of 0-100. Above 70, depicts the strong trend, and Below 30 depicts the weak trend.
How To Use The Aroon Indicator For Trading?
To use the Aroon Indicator, follow these steps:
1. Choose the Period
Firstly, select the number of periods for the calculator. This can be any time period according to your preferences, trading style, timeframe, and instrument. This is already set at 14 or 25 days.
2. Identify Highs and Lows
After choosing the period, one needs to determine the highest and lowest price points, as this information will be required to perform the next step.
3. Calculate Aroon Up
You can calculate the Aroon Up with the given formula. Arron Up = (N – Periods since N period High / N) * 100. If the Aroon Up value is above 70, then it signifies a strong bullish trend. At this moment, traders may look for buying opportunities.
4. Calculate Aroon Down
You can calculate the Aroon Down with the given formula. Aroon Down = (N – Periods since N period Low / N) * 100. If the Aroon Down value is above 70, then it indicates a strong bearish trend. At this moment, traders may look for selling opportunities.
Interpreting Aroon Indicator
The Aroon indicator can be interpreted in various ways according to market trends and volatility.
1. Identifying the Trend Direction
As earlier stated, the indicator consists of two lines: Arron Up and Aroon Down lines. When Aroon Up is above Aroon Down, it indicates a bullish trend. Reversely, when Aroon Down is above Aroon Up, it indicates a bearish trend.
2. Determining the Trend Strength
You can also determine the strength of the trend with this technical analysis indicator. When Arron Up or Arron Down is above 70, it indicates a strong trend in the corresponding direction, while below 30 indicates a weak trend.
3. Identifying Trend Changes
The intersection between the Aroon Up and Aroon Down lines signals trend changes. When Aroon Up crosses above Aroon Down, a bullish trend shift is indicated. Conversely, when Arron Down crosses above Aroon Up, a bearish trend shift is indicated.
Conclusion
In a nutshell, the Aroon Indicator is a powerful technical analysis tool that can help traders identify changes in emerging trends or new trends in the stock market. While it helps traders spot the early trend, indicating the trend’s strength, it also comes with several limitations, such as false signals, lagging indicators, and many more.
That’s why it is crucial to use the Aroon indicator in conjunction with other technical analysis tools to enhance the accuracy of your predictions. This multi-tool approach can help mitigate the risks associated with the Aroon indicator.
