By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com

The Aroon is a trending indicator used to measure if a security is in a trend and the magnitude of that trend. The indicator can also be used to identify when a new trend is set to begin.

The indicator is comprised of two lines, an Aroon-up line and an Aroon-down line.

The Aroon-up line measures the amount of time it has been since the highest price during the time period. The Aroon-down line, on the other hand, measures the amount of time since the lowest price during the time period.

If a 100 period timeframe is used and it has been 25 periods since the highest price in the last 100 days the Aroon up value would currently be set at 75. If it has been 80 periods since the lowest period the Aroon down would be 20. The numbers computed for each of the up and down are then plotted as a line on the Aroon indicator between a range of zero and 100.

Calculation

In general, the security is considered to be in an uptrend when the Aroon-up line is above 70 along with being above the Aroon-down line. The security is in a downtrend when the Aroon-down line is above 70 and also above the Aroon-up line. The trend is considered to be in a consolidation pattern when the two lines are near each other in between 70 and 30.


As you can see from the chart above, trend reversal signals are given when the Aroon up and Aroon down cross each other or the Aroon lines cross the 50 line on the chart. Note: These two events do not always occur at the same time like they did in the chart above. If an Aroon up falls below the 50 like it did in the chart, it signals that the uptrend is weakening. The downtrend is weakening when the Aroon down crosses below the 50 line. It is the same idea when the Aroon up or down crosses above the 50 it signals that the trend is strengthening.

Aroon Oscillator
An expansion of the Aroon is the calculation of the Aroon oscillator, which simply plots the difference between the Aroon-up and -down lines. This line is again plotted between a range of -100 and 100. The centerline at zero in the oscillator is considered to be a major signal line determining the trend.

The higher the value of the oscillator from the centerline point, the more upward strength there is in the security and the lower from the centerline the more downward pressure.

The Aroon lines and Aroon oscillators are fairly simple concepts to comprehend but yield powerful information about trends. This is another great indicator to add to the arsenal of any technical trader.


Next: Exploring Oscillators and Indicators: MACD »



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