20/11/2019 Aroon Indicator Definition and Uses

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Aroon Indicator Definition and Uses

REVIEWED BY CORY MITCHELL | Updated Jun 25, 2019

What is the Aroon Indicator?

The Aroon indicator is a technical indicator that is used to identify trend changes in the price
of an asset, as well as the strength of that trend. In essence, the indicator measures the time
between highs and the time between lows over a time period. The idea is that strong
uptrends will regularly see new highs, and strong downtrends will regularly see new lows.
The indicator signals when this is happening, and when it isn't.

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The indicator consists of the "Aroon up" line, which measures the strength of the uptrend,
and the "Aroon down" line, which measures the strength of the downtrend.

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The Aroon indicator was developed by Tushar Chande in 1995.

TradingView.

KEY TAKEAWAYS
The Arron indicator is composed of two lines. An up line which measures the
number of periods since a High, and a down line which measures the number of
periods since a Low.
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The indicator is typically applied to 25 periods of data, so the indicator is showing

how many periods it has been since a 25-period high or low.
When the Aroon Up is above the Aroon Down, it indicates bullish price behavior.
When the Aroon Down is above the Aroon Up, it signals bearish price behavior.
Crossovers of the two lines can signal trend changes. For example, when Aroon Up
crosses above Aroon Down it may mean a new uptrend is starting.
The indicator moves between zero and 100. A reading above 50 means that a
high/low (whichever line is above 50) was seen within the last 12 periods.
A reading below 50 means that the high/low was seen within the 13 periods.

Formulas for the Aroon Indicator

25 − Periods Since 25 period High
Aroon Up = ∗ 100
25
25 − Periods Since 25 period Low
Aroon Down = ∗ 100
25

How to Calculate the Aroon Indicator

The Aroon calculation requires the tracking of the high and low prices, typically over 25
periods.

1. Track the highs and lows for the last 25 periods on an asset.
2. Note the number of periods since the last high and low.
3. Plug these numbers into the Up and Down Aroon formulas.

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What Does the Aroon Indicator Tell You?

The Aroon Up and the Aroon Down lines fluctuate between zero and 100, with values close to
100 indicating a strong trend and values near zero indicating a weak trend. The lower the
Aroon Up, the weaker the uptrend and the stronger the downtrend, and vice versa. The main
assumption underlying this indicator is that a stock's price will close regularly at new highs
during an uptrend, and regularly make new lows in a downtrend.

The indicator focuses on the last 25 periods, but is scaled to zero and 100. Therefore, an
Aroon Up reading above 50 means the price made a new high within the last 12.5 periods. A
reading near 100 means a high was seen very recently. The same concepts apply to the Down
Aroon. When it is above 50, a low was witnessed within the 12.5 periods. A Down reading
near 100 means a low was seen very recently.

Crossovers can signal entry or exit points. Up crossing above Down can be a signal to buy.
Down crossing below Up may be a signal to sell.

When both indicators are below 50 it can signal that the price is consolidating. New highs or
lows are not being created. Traders can watch for breakouts as well as the next Aroon
crossover to signal which direction price is going.

Example of How to Use the Aroon Indicator

The following chart shows an example of the Aroon indicator and how it can be interpreted.

Chart showing an example of the aroon indicator.

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In the chart above, there is both the Aroon indicator and an oscillator that combines both
lines into a single reading of between 100 and -100. The crossover of the Aroon Up and Aroon
Down indicated a reversal in the trend. While the index was trending, prior to the reversal,
the Aroon Down remained very low, suggesting that the index had a bullish bias. Despite the
rally on the far right, the Aroon indicator hasn't shown a bullish bias yet. This is because the
price rebounded so quickly that it hasn't made a new high in the last 25 periods (at the time
of the screenshot), despite the rally.

The Difference Between the Aroon Indicator and the Directional

Movement Index (DMI)
The Arron indicator is similar to the Directional Movement Index (DMI) developed by Welles
Wilder. It too uses up and down lines to show the direction of a trend. The main difference is
that the Aroon indicator formulas are primarily focused on the amount of time between
highs and lows. The DMI measures the price difference between current highs/lows and prior
highs/lows. Therefore, the main factor in the DMI is price, and not time.

Limitations of Using the Aroon Indicator

The Aroon indicator may at times signal a good entry or exit, but other times it will provide
poor or false signals. The buy or sell signal may occur too late, after a substantial price move
has already occurred. This happens because the indicator is looking backwards, and isn't
predictive in nature.

A crossover may look good on the indicator, but that doesn't mean the price will necessarily
make a big move. The indicator isn't factoring the size of moves, it only cares about the
number of days since a high or low. Even if the price is relatively flat, crossovers will occur as
eventually a new high or low will be made within the last 25 periods. Traders still need to use
price analysis, and potentially other indicators, to make informed trading decisions. Relying
solely on one indicator isn't advised.

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Related Terms
Aroon Oscillator Definition and Tactics
The Aroon Oscillator is a trend-following indicator that uses aspects of the Aroon Indicator to gauge
the strength of a current trend and the likelihood that it will continue. Crosses of the zero line signal
trend changes and possible trades. more

Directional Movement Index - DMI Definition and Uses

The Directional Movement Index, or DMI, is an indicator that identifies whether an asset is trending. It
does this by comparing highs and lows over time. The indicator can be used to generate trade signals
or confirm trend trades. more

Positive Directional Indicator (+DI) Definition and Uses

The Positive Directional Indicator (+DI) is one of the lines in the Average Directional Index (ADX)
indicator and is used to measure the presence of an uptrend. more

Dynamic Momentum Index Definition and Uses

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The dynamic momentum index is used in technical analysis to determine if a security is overbought or
oversold. It can be used to generate trading signals in trending or ranging markets. more

Average Directional Index - ADX Definition and Uses

The Average Directional Index (ADX) helps traders see the trend direction as well as the strength of
that trend. The ADX is commonly shown with two other indicators, the Minus and Plus Directional
Indicators. more

Price Rate Of Change Indicator - ROC Definition and Uses

Price rate of change (ROC) is a technical indicator that measures the percent change between the
most recent price and a price in the past. It can be used to help identify trends, help confirm reversals,
and highlight where reversals may occur. more

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