Aroon Indicator

Written by Miroslav Marinov

Miroslav Marinov

Miroslav Marinov, a financial news editor at TradingPedia, is engaged with observing and reporting on the tendencies in the Foreign Exchange Market, as currently his focus is set on the major currencies of eight developed nations worldwide.

, | Updated: October 30, 2024

This indicator was developed by Tushar Chande in 1995, with its main objective being to identify if a particular trading instrument is in a trend and how strong the trend is. As the indicator is designed to detect the beginning of new trends, Chande gave it the name ”Aroon”, or ”Dawns Early Light” in Sanskrit.

The Aroon indicator shows how many periods have passed since the price registered an I-day low or an I-day high. The indicator itself is presented by two lines, named Aroon (Up) and Aroon (Down). Aroon (Up) reveals the amount of time (in percentage), which has passed between the beginning of the time period and the moment, at which the highest price level during that time period was reached. In case the instrument is recording a new bottom during the examined time period, then Aroon (Up) will be equal to zero. In case the instrument marks a higher close than it has during the remainder of the time period, then Aroon (Up) will be equal to +100. During every consecutive period, which passes without the setting of a new peak, Aroon (Up) will move to the downside by the amount equal to (1/number of periods) x 100.

Aroon (Down) will be equal to zero, if the trading instrument is recording a new peak during the examined time period. Aroon (Down) will be equal to +100, if the instrument marks a lower close than it has during the remainder of the time period.

Aroon (Up) is calculated as follows:

Aroon (Up) = [ [ (number of periods) – (number of periods since highest peak during that time) ] / (number of periods) ] x 100

Aroon (Down) is calculated as follows:

Aroon (Down) = [ [ (number of periods) – (number of periods since lowest bottom during that time) ] / (number of periods) ] x 100

Let us provide an example. On the 1-day chart we set a 20-day Aroon (Up) line. If the highest price level during the past 20 days was reached 8 days ago (or 12 days since the beginning of the time period), Aroon (Up) for the present trading day would be equal to ((20-8)/20) x 100, or 60. If the lowest price level during the past 20 days was reached 2 days ago, Aroon (Down) for the present trading day would be equal to ((20-2)/20) x 100, or 90.

Aroon (Up) and Aroon (Down) move within the range of 0-100 and through the centerline of 50. Buyers have the advantage, when Aroon (Up) stays above 50 and Aroon (Down) stays below 50. Sellers have the advantage, when Aroon (Up) stays below 50 and Aroon (Down) stays above 50. If one of the indicators rises to 100, this signifies that a new trend may be beginning. At the same time, the other Aroon indicator needs to be falling. For example, if Aroon (Up) is close to 100, while Aroon (Down) is below 30, this is evidence that bulls are strong.

There are usually three stages to the signal that a new trend is probably beginning: 1) Aroon lines cross, 2) Aroon lines cross below/above the centerline of 50, 3) one of the lines reaches 100. For a bull trend signal, the first stage is when Aroon (Up) moves above Aroon (Down), the second stage is when Aroon (Up) moves above the centerline and Aroon (Down) moves below the centerline, while the third stage is when Aroon (Up) comes close to 100 and Aroon (Down) stays at low levels.

Aroon lines can also provide a signal of consolidating market, when both indicators stay below the centerline or both are moving to the downside in a parallel manner.

Chart Source: VT Trader