What is the 'Aroon Oscillator'

An Aroon Oscillator is a trend-following indicator that uses aspects of the Aroon Indicator ("Aroon Up" and "Aroon Down") to gauge the strength of a current trend and the likelihood that it will continue. The Aroon Oscillator is calculated by subtracting Aroon Up from Aroon Down. Readings above zero indicate that an uptrend is present, while readings below zero indicate that a downtrend is present.

BREAKING DOWN 'Aroon Oscillator'

The Aroon Oscillator was developed by Tushar Chande in 1995 as part of the Aroon Indicator system. Chande’s intentions for the system were to serve as indicators for new trends. Thus, the name aroon is derived from Sanskrit language and translated to mean “dawn’s early light.”

Aroon Indicators

The Aroon Indicator system includes the Aroon Up, Aroon Down and Aroon Oscillator. The Aroon Up and Aroon Down lines must be calculated first before drawing the Aroon Oscillator.

This indicator typically uses a timeframe of 25 days however the timeframe is subjective. Using a 25-day timeframe, the Aroon Up and Aroon Down timeframes are calculated as follows:

Aroon Up = ((25 - Days Since 25-Day High) / 25) x 100

Aroon Down – ((25 - Days Since 25-Day Low) / 25) x 100

These indicator lines will be between zero and 100. This methodology provides an indicator that provides insight on the relationship between time and a security’s price.

On a scale of zero to 100, the higher the indicator’s value, the stronger the trend. For example, a price reaching new highs nearly everyday would have an Aroon Up value of 96 ((25-1)/25)x100). Similarly, a price reaching new lows nearly everyday would have an Aroon Down value of 96 ((25-1)x100).

Aroon Oscillator Calculation

As a security’s price oscillates it creates an opportunity to capture the difference through the Aroon Oscillator. Thus, the Aroon Oscillator is calculated by subtracting a security’s Aroon Up value from its Aroon Down value.

The highs and lows used in the Aroon Up and Aroon Down calculations help to create an inverse relationship between the two lines. When the Aroon Up value increases, the Aroon Down value will typically see a decrease and vice versa.

Inferences from the Aroon Oscillator

The Aroon Oscillator is a line that can fall between -100 and 100. A high Oscillator value is an indication of an uptrend while a low Oscillator value is an indication of a downtrend.

When Aroon Up remains high from consecutive new highs, the Oscillator value will be high, following the uptrend. When a security’s price is on a downtrend with many new lows, the Aroon Down value will be higher resulting in a lower Oscillator value.

The Aroon Oscillator line can be included with or without the Aroon Up and Aroon Down lines in a technical analysis diagram. Significant changes in the direction of the Aroon Oscillator can help to identify a new trend. Traders will often use this oscillator in conjunction with other signals to identify and confirm a reversal.

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