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:

ATAroon_1r.gif
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:

ATAroon_2r.gif
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.

Conclusion
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. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  2. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  3. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  4. Investing News

    Is It Time To Sell Technology Stocks? (LNKD, AAPL)

    Technology stocks have taken a drubbing in recent days. Is it time to sell them?
  5. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  6. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  7. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  8. Fundamental Analysis

    3 Long-Term Investing Strategies With Strong Track Records

    Learn why discipline and a statistically valid investment strategy can help an investor limit losses and beat the market over the long term.
  9. Chart Advisor

    These 3 ETFs Suggest Commodities Are Headed Lower (COMT,CCX,DBC)

    The charts of these three exchange traded funds suggest that commodities are stuck in a downtrend and it doesn't look like it will reverse any time soon.
  10. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
RELATED FAQS
  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 is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center