In 1995 Tushar Chande, a principal of Tuscarora Capital Management and author of "The New Technical Trader" (1994) and "Beyond Technical Analysis" (2001), developed the Aroon indicator to determine trend direction and strength. The indicator's greatest value is in helping traders and investors to distinguish whether a long-term trend is ending or simply stalling before another move. This article will show you how to calculate and apply the Aroon indicator to your own trading.

Calculating Aroon
The Aroon indicator can be calculated using the following formula:

Bullish - [(# of periods) - (# of periods since highest high)] / (# of periods)] x 100
Bearish - [(# of periods) - (# of periods since lowest low)] / (# of periods)] x 100

If we take a look at these formulas, it is apparent that they are both looking at how recent the latest highs and lows were. Higher Aroon values indicate more recent highs and lows, while lower values indicate less recent highs and lows. Moreover, the Aroon values oscillate between 100 and 0 - a higher number indicates a stronger trend and vice versa.

The two Aroon indicators (bullish and bearish) can also be made into a single oscillator by making the bullish indicator 100 to 0 and the bearish indicator 0 to -100 and finding the difference between the two values. This oscillator then varies between 100 and -100, with 0 indicating no trend.

Using the Aroon Indicator
The Aroon indicator is used by plotting the bullish and bearish versions on the same sub-chart, or by plotting the oscillator on a single sub-chart.

The key to successfully using the Aroon indicators lies in watching two things:

  • Indicator Movements Around the Key Levels, 30 and 70 - Movements above 70 indicate a strong trend, while movements below 30 indicate low trend strength. Movements between 30 and 70 indicate indecision. For example, if the bullish indicator remains above 70 while the bearish indicator remains below 30, the trend is definitively bullish.
  • Crossovers Between the Bullish and Bearish Indicators - Crossovers indicate confirmations if they occur between 30 and 70. For example, if the bullish indicator crosses above the bearish indicator, it confirms a bullish trend.

Let's take a look at an example:

Figure 1

Here we have an example of Titanium Metals (TIE), a stock that recently trended strongly on increased demand for titanium. Notice that when the Aroon indicators were on opposite ends of the 30-70 barriers, the price was in a strong trend. Also note that when crossovers occurred within the 30-70 barriers, it often signaled a confirmation of the new trend.

The Aroon oscillator is a bit simpler, but provides less information. The key levels to watch are 50, 0 and -50. When the oscillator moves above 50, it indicates a strong bullish trend. When it hovers around 0, it indicates the lack of a definitive trend. And finally, when it breaks below -50, it indicates a strong bearish trend.

Let's take a look at the same chart using the oscillator:

Figure 2

Here we can see very similar information but with a lack of confirmations because there is no crossover possible with an oscillator.

It is important to realize when looking at these charts that the Aroon indicator is lagging and, therefore, is susceptible to sharp price drops or increases. Therefore, it is very important to use other methodologies in order to exit prudently. For example, watching for high volume reversal candles is a good way to get out at the right point in the event of a sharp price reversal. Stop-loss points set at key support levels are another good way to control risk.

Investors may prefer the oscillator because it is easier to read and tends to have less contradictory signals. Meanwhile, active traders may appreciate the additional information given by the two indicators. It is up to you to determine which methodology works best for your needs and apply it to your own trading. They both offer an excellent way to determine whether a trend exists, and how strong that trend is.

The Aroon indicator is used best by traders and investors interested in whether or not a trend is still intact. It can help traders avoid inefficient use of capital by allowing them to seek other opportunities during sideways markets and only hold positions during strong trends. However, it is important to watch carefully and analyze stocks using other studies in conjunction with Aroon to avoid the primary weakness in this system - sharp price movements.

Related Articles
  1. Chart Advisor

    ChartAdvisor for October 2 2015

    Weekly technical summary of the major U.S. indexes.
  2. Investing

    How Diversifying Can Help You Manage Market Mayhem

    The recent market volatility, while not unexpected, has certainly been hard for any investor to digest.
  3. Technical Indicators

    Why MACD Divergence Is an Unreliable Signal

    MACD divergence is a popular method for predicting reversals, but unfortunately it isn't very accurate. Learn the weaknesses of indicator divergence.
  4. Chart Advisor

    Weakness In Biotech Will Likely Continue

    You can breathe easy with your biotech holdings--assuming you aren't counting on them to make you rich.
  5. Chart Advisor

    Expecting a Big Breakout In These 4 Stocks

    These stocks are tightly wound following big moves, and upon breakout more big moves could ensue.
  6. Chart Advisor

    Trade Base Metals With These 3 ETFs

    News out of Alcoa is causing active traders to turn toward base metals for opportunities. Before diving into the market, check out the charts of these three ETFs.
  7. Charts & Patterns

    The Importance Of Tracking The Whisper Number

    Don't let the name fool you: Whisper numbers are making themselves heard. Here's why you should be paying attention.
  8. Chart Advisor

    Stocks With Buy Signals in a Bear Market

    The short-term trend may be down, but these stocks are showing strength to the upside.
  9. Chart Advisor

    ChartAdvisor for September 25 2015

    Weekly technical summary of the major U.S. indexes.
  10. Chart Advisor

    Downtrending Stocks to Short or Sell

    These stocks are trending lower and currently near a short sale areas, based on breaks lower and falling stock indexes.
  1. What is the Aroon indicator formula and how is the indicator calculated?

    The Aroon indicator is actually comprised of two separate indicators: Aroon up and the Aroon down. Aroon up is calculated ... Read Full Answer >>
  2. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  3. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  4. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!