Aroon indicator review
The Aroon indicator was created by Tushar Chande, the Head of «Tuscarora Capital Management», who is also known for combining two indicators – Stochastic and RSI in one instrument, and also creating the RAVI indicator. Aroon was supposed to serve as an indicator that gives the earliest signals to open positions.
As envisioned by the author, his indicator should generate early signals during trading, that is why he called it «aroon», which in Sanskrit means «early light of dawn». In practical trading, Aroon is used to determine the strength and direction of a trend and the situation when a trend changes to flat and vice versa. Aroon features a small system consisting of 2 lines and oscillators, which displays the interaction of lines. There are two lines: Aroon Up and Aroon Down (fig. 3). The oscillator ranges from 0 to 100.
The Up indicator line shows how many periods have passed from the moment when the local maximum is formed, the Down line shows the number of periods that have passed since the local minimum moment. Its peculiarity is that only the extremes falling within a certain period are taken into account, the indicator builds an index based on the data of the last price bars. This period is equal to 14 by default.
Sign in by broker’s terminal, add the Aroon indicator to the chart, and see what happens
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|$10||1:1000||from 0, 007 points||2013||Review||Visit Broker Demo|
|$200||1:500||from 0 points||2015||Review||Visit Broker Demo|
|$100||1:30 EU (1: 400 other countries)||from 0.5 points||2001||Review||Visit Broker Demo|
Aroon application and signals
Aroon indicator is created for stock and commodity markets. In Forex trading, the intersection of lines is the main signal. For example, intersection of the Aroon Down line by the Aroon Up line from bottom to top indicates the emergence of a medium-term up trend and the possibility of opening a buy position. If Aroon Up intersects the Aroon Down line from top to bottom, this is a signal to exit the purchase (Forex trading).
On the contrary, intersection of the Aroon Up line by the Aroon Down line from top to bottom indicates the emergence and possible development of a down trend and the possibility of opening a sell position. Intersection of the Aroon Up line by the Aroon Down line from bottom to top will be exiting the position (Forex trading training).
Author of the indicator suggested considering such signals: an oscillator indicator above 50 shows a strong uptrend, an indicator below 50 shows a downtrend, correspondingly. If the indicators fluctuate around zero, this means that the market is in flat. On the Aroon indicator it is customary to select levels 70, 50, 30 (fig. 4), the intersection of which provides a clear picture on the market situation.
If the Aroon Up line moves between 0% and 30%, this is considered as a signal of possible uptrend formation, but only a possible one. If the Aroon Up moves within the range from 30% to 70%, this already increases the uptrend likelihood. Thus, if Aroon Up is located for a long time above 70%, while the second line cannot reach the level of 30%; this situation indicates a strong trend.
If Aroon Up is constantly about 100, it means that buyers dominate in the market, especially if the Aroon Down line fluctuates around zero. If Aroon Up crossed the 100% level from the bottom up, this indicates a strong ascending trend. If the Aroon Down line breaks the 100% level from the bottom up, this is a sign of a strong downtrend. If the Aroon Down moves at the level of 100, and up moves at the indicator bottom (Fig. 5), then this indicates the absolute dominance of sellers.
The movement of Aroon Down between 70% and 100% indicates that a descending trend is strengthening, especially if Aroon Up is located within the range from 0 to 30%. The movement of the Aroon Down line between 30% and 70% means that the occurrence of a descending trend is very likely. A down movement between 0% and 30% indicates that a downtrend is forming, but it is unstable so far and a market reversal can take place. If both lines intersect, this may indicate the completion of a flat or a new trend formation. If the lines move in parallel, then the flat movement dominates in the market.
Aroon installation and settings
Aroon is not included in the list of standard trading platform tools. In particular, for MT5 you need to download it, for example, using this link. The mq5 file is downloaded to the mql5 folder on the computer, and from there it shall be extracted and downloaded into the terminal by two clicks by: File – Open the data directory – two clicks on the file MQL5 Program (fig.6). The indicator will appear in the user list.
The default settings are Aroon 14. But the period can be changed according to strategy and goals. If the period is longer, then longer sections of the trend can be analysed. A period of 25 is set most often in this case. But in this case, you cannot see the signals in smaller areas. A shorter period enables you to analyse small areas of the trend, catch small signals, but it is difficult to trade on long time frames in this case. The indicator’s standard settings include such periods as 14; 25. Short-term trading is performed at period 10, and long-term transactions are concluded at period 50.
Strategy with Aroon
Working with Aroon indicator alone is not recommended; it gives false signals, although not often. The developer of Aroon indicator himself did not recommend using Aroon without other indicators. Besides, two Aroon indicators with different periods do not work on the price chart. Tushar Chande also considered his indicator to be a predictive tool, rather than a trading one. However, there are strategies only for Aroon. If lines intersect, when Aroon Up is located above and near mark of 70, and Aroon Down is located below and near the mark of lower than 30, a sell position is placed. Buy positions are placed when the situation is opposite one.
The number of errors can be reduced using additional indicators. In particular, moving averages of different types are used with this indicator. Aroon is the most representative for displaying the dynamics in individual short-term periods, it is able to a lesser extent to see the leading trend for a long period of time. It is necessary to add an indicator with a long period to draw up an effective strategy, for example, a moving average with a period of 90 (fig. 7), which will show a long-term trend.
A buy signal will be the intersection of the Aroon Down line by Aroon Up line from bottom to top, while the price is placed exactly above the moving average. A sell signal will be placement of the price under the moving average with a period of 90, and Aroon Up will intersect Aroon Down from bottom to top. A strategy is also implemented using an exponential moving average with a sufficiently long period, for example, with a period of 65. If the price is placed above this line, and Aroon gives a standard buy signal, and a corresponding position is placed.
You can use two moving averages with different periods with the Aroon indicator. For example, with a period of 5 and 20. In this case, you need to track intersection of sliding scales and at the same time of the Aroon indicator lines. There is also a sufficiently well-known strategy where Aroon and another Parabolic SAR trend indicator are used (fig. 8). The strategy is implemented on a timeframe H1 and above. Aroon is set with a standard period of 14, as for Parabolic SAR (0.02, max 0.2). In this case, Parabolic SAR functions as a false signals filter. Intersection of Aroon indicator lines will serve as a signal to place orders.
Conditions for opening a buy position when the Aroon Up line intersects the Aroon Down line from bottom to top, while the Parabolic SAR is placed below the price; the bar at which the transaction is made must be upward. Conditions for opening a sell position are formed when the Aroon Up line intersects the Aroon Down line from top to bottom, while the Parabolic SAR is placed above the price; the transaction is made on a downward bar. Moreover, you need to set a stop loss at the Parabolic SAR level.
Another strategy involves using Aroon with a period of 25, together with Parabolic Sar and ZigZag indicator. The main long-term trend is determined using Sar and specified using ZigZag. The orders are placed according to signals similar to the previous strategy. A buy position opens when the Aroon Up line fluctuates around 70%, while Aroon Down is below 30%. In this case, the Parabolic SAR should be located below the price, and ZigZag shows an ascending trend. A sell position opens when the Aroon Down line fluctuates around 70%, while Aroon Up is below 30%. In this case, the Parabolic SAR should be located below the price, and ZigZag shows an ascending trend.
Aroon is used in the strategy with T3_MACO, ADX indicators and moving averages 5 EMA, 50 EMA and 20 EMA. Trading is performed on any timeframe. T3_MACO indicator is a usual MACD indicator modification, just T3_MACO is not displayed as a histogram, but as a line similar to MA, but not on the price chart, but in a separate window of the trading terminal. ADX (Average Directional Index) is one of the popular indicators enabling you to determine the strength of a trend and predict its dynamics. The indicator with a period of 14 is set in this strategy.
Buy positions are opened when the price is above the EMA (50), the moving average EMA (5) intersects WMA (20) from the bottom up. At the same time, the Aroon Up line intersects the Down line from bottom to top within the range from 40 to 80. Moreover, T3 should be at level zero upward, and the ADX indicator +DI line should intersect the -DI line from the bottom up.
Aroon is a non-standard small system of indicators for determining the dynamics of a trend, therefore it is used relatively rarely. Aroon is not the most difficult indicator, but interpreting its signals and putting it into practice requires certain skills. The Aroon advantage for trading is enabling you to rather objectively assess the market situation, see the flat movement or trend at any development stage. It is characterized by a rather high reliability degree, it rarely generates false signals, and gives accurate signals for a trend reversal. At the same time, the Aroon indicator signals are unambiguous in their interpretation.
Disadvantages of the indicator include the delay in movement of the Aroon Up and Aroon Down signal lines, especially in case of sharp changes in market dynamics. Therefore, it is desirable to use it combining with other indicators and oscillators and upon availability of certain skills in the Forex market.