In the rapid dynamics of trading, the ability to recognize the beginning of a trend, and changes in the momentum of the price, is instrumental. Many traders get confused as to whether the market is in a trend or in a consolidation phase. The very confusion breeds bad trading decisions, missed opportunities, and unnecessary losses. Without the proper means of assessing market conditions, traders must struggle along, making confident moves in either direction.
Fortunately, technical indicators help traders with their decisions. The Aroon Indicator is one such tool; it has been solely designed to provide the strength and direction of a trend. This is not something complicated to use but quite strong to make sure that traders can work out whether the market is trending or merely consolidating, thus enabling them to time entry and exit.
In this manual, Deep Dive will go deep into the Aroon Indicator, first by exploring its function, setup, and application to effectively enrich a trading strategy. Whether one is an emerging or a seasoned investor, mastering the Aroon Indicator can unlock the door toward much more profitable options.
What is the Aroon Indicator?
Aroon Indicator refers to a form of technical analysis developed by Tushar Chande in 1995. The Sanskrit word “Aroon” loosely translates into “dawn’s early light” and signifies the indicator’s ability to provide insight into a new trend. Unlike many other oscillators that are only concerned with price momentum, the Aroon Indicator was specifically developed to measure the time difference between highs and lows of prices over a definite period.
How It Works
The Aroon Indicator consists of two lines:
- Aroon Up: This is the time elapsed since the highest high in the selected timeframe. It is represented by an orange line.
- Aroon Down: It reflects the time elapsed since the lowest low of the period currently chosen was reached. It is represented by a blue line.
Both lines move back and forth between 0 and 100, painting a picture of the recency of the highest high or lowest low. The default lookback is 25, and that can be adjusted based on your timeframe in which you are trading.
- Aroon Up Near 100%: This shows that a high was made very recently, and the market is in a strong uptrend.
- Aroon Down Near 100%: Indicates that a low was recently made, and the market is in a strong downtrend.
- Both Under 50%: This means there is a consolidating market, with no strong trend since the market is indecisive.
Creating Aroon Indicator
The Aroon Indicator can be set up rather easily on most trading platforms, such as TradingView, MT, among others. Here’s how to set it up on TradingView in steps:
- Open Your Chart: Select the asset you want to track, e.g., currency pair, stock, or index.
- Add the Aroon Indicator: Below the chart, select the “Indicators” menu item. In the search box, type “Aroon,” then select the indicator from the results.
- Settings: You can change the default period of 25 to whatever you want, depending on your trading style. For short-term trades, a period such as 14 might be suitable, whereas 50 or higher would be better for longer-term analysis.
How to Use the Aroon Indicator in Your Trading
The Aroon Indicator can be integrated into numerous trading strategies, making it versatile for both trend-following and range-bound traders. Here are several ways to use this indicator:
1. Aroon Crossover Strategy
One of the most popular applications of the Aroon Indicator is the crossover strategy, which depends on the points where Aroon Up and Aroon Down lines intersect.
- Bullish Crossover: When the Aroon Up line crosses above the Aroon Down line, it indicates the start of a new uptrend. Traders could consider entry by taking a long position, expecting upward continuation.
- Bearish Crossover: When the Aroon Down crosses above the Aroon Up, it signals a downtrend. This could be a time to short the asset in anticipation of downside.
For example, when Aroon Up crosses above 70% and Aroon Down drops below 30%, this signals a strong bullish trend. Conversely, if Aroon Down crosses above 70%, a strong bearish trend is likely to follow.
2. Trend Confirmation
The Aroon Indicator also confirms pre-existing trends before making a trade entry. It works well when combined with other indicators, such as Moving Averages or RSI.
- Long Trades: Consider opening long positions when Aroon Up is consistently above 50, and Aroon Down is below 50. This typically signals an uptrend.
- Short Trades: Aroon Down should remain above 50, and Aroon Up below 50, indicating a downtrend where short trades could be more effective.
3. Avoiding Choppy Markets
An advanced use of the Aroon Indicator is identifying no-trade zones or times when the market is in consolidation. If both Aroon Up and Aroon Down are below 50, the market is choppy or range-bound, which is unfavorable for trend-based trades.
- Wait for a Clear Trend: In such cases, it is wise to stay out of trades and await one of the Aroon lines to cross above 50, indicating a new trend. This helps filter out false signals and reduce risk.
Aroon Indicator Combined with Other Indicators
While the Aroon Indicator is powerful on its own, it’s even more effective when combined with other technical analysis tools:
- Moving Averages: Always confirm the direction of a trend with moving averages before taking an Aroon crossover. For example, when Aroon Up crosses above Aroon Down, but the price remains below the 200-day MA, you might wait for further confirmation before going long.
- RSI for Overbought/Oversold Conditions: Combine the Aroon Indicator with the RSI to detect overbought or oversold conditions. If the Aroon indicates a strong trend but RSI shows overbought conditions, wait for a pullback.
- Support and Resistance Levels: The Aroon Indicator can also be used to establish breakouts from significant support or resistance levels. Along with price action, this provides a clearer picture of potential market movements.
Conclusion
The Aroon Indicator is a valuable tool for traders to identify trends and periods of market consolidation. From crossovers and trend confirmations to avoiding choppy markets, the Aroon Indicator provides key insights into price movement strength. Mastering this indicator can lead to better strategy, decision-making, and overall confidence in trading.
As with any other tool, proper training and application are essential. Combine the Aroon Indicator with other technical indicators and employ sound risk management strategies to get the most out of your trades.
