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Description and methodology

This indicator was developed by Tushar Candle in 1995. Aroon is an indicator system to recognise whether the share is in a trend phase and the strength of the trend. The only parameter of the Aroon indicator is the number of periods. It consists of two lines:

  • Aroon(up) line: The Aroon(up) is the sum of time (on a percentage grade). It goes from the beginning to the end of the chosen period. When the share closes at a new peak in the given period, the Aroon(up) is going to be +100. The Aroon(up) value will be the following for every period following this event (until a new peak): 
    [latex]\frac{1}{N(periods)}\times 100[/latex]

 

    The Aroon(up) formula is calculated the following way: 
    [latex]Aroon(up)=\frac{N(periods)-N(periodsSinceHighestHigh)}{N(periods)}\times 100[/latex]

 

    For example, let the Aroon(up) line consist of 10 periods as a daily chart. If the last maximum point happened 6 days ago in the past 10 days (on the 4th day), the calculation of Aroon(up) is: ((10 - 6) / 10) x 100 = 40.

  • Aroon(down) line: The calculation of the Aroon(down) is the exact opposite of the Aroon(up)’s: minimum points should be used for the calculation instead of maximum points. The value of Aroon(down) for a new minimum point will be +100. The Aroon(down) value will be the following for every period following this event (until a new trough):
    [latex]\frac{1}{N(periods)}\times 100[/latex]

 

    The Aroon(down) formula is calculated the following way: 
    [latex]Aroon(down)=\frac{N(periods)-N(periodsSinceLowestLow)}{N(periods)}\times 100[/latex] 
    If the last minimum point happened yesterday in the past 10 days (on the 9th day), the Aroon(down) is 90.

The Aroon Oscillator is the difference of the Aroon(up) and Aroon(down):

[latex]AroonOscilator=AroonUp-AroonDown[/latex]

The values of the two measures are between 0 and +100. Therefore, the value of the Aroon Oscillator will oscillate between -100 and +100.

Trading signals

  • When the Aroon(up) and Aroon(down) decrease close to each other, it means a consolidation phase and there is no strong trend on the market.
  • When the Aroon(up) is below 50, the current trend has lost its increasing momentum. When the Aroon(up) is below 50, the current trend has lost its decreasing momentum. Values above 70 indicate a strong trend in the same direction as the Aroon(up/down) lines.
  • The Aroon Oscillator signals an ascending trend when its value is larger than 0, and an inclining trend when the value is smaller than 0. The further the Oscillator’s value from 0, the stronger the trend.
Aroon indicator movements

Aroon indicator movements

Use

The use of the indicator is based on the trading signals. When the Aroon(up) and Aroon(down) lines move together, the trend is not clear. When Aroon(up) is below 50, the ascending trend has lost its momentum. When Aroon(down) is below 50, the descending trend has lost its momentum. When both lines are above 70, the trend is one-directional and strong. When both lines are below 30, the trend is opposite-directional.

Examples

The chart below illustrates the TIE share. Values above 70 and below 30 indicate strong trends.

Aroon indicator’s extreme values

Aroon indicator’s extreme values

The Aroon Oscillator’s interpretation is somewhat easier, but provides less information. When its value is above 50, the market is in a strongly ascending trend phase. When its value is below -50, the market is in a strongly inclining trend phase. This is clearly shown on the chart below.

Aroon Oscillator example

Aroon Oscillator example