Aroon is a remarkably insightful indicator that quantifies the strength of a price trend. Traders use this signal to generate buy/sell points and support other technical indicators.
This is the first of a two-part article that teaches you how to interpret Aroon. The second part offers a free Excel spreadsheet that calculates & plots Aroon from historical market data downloaded from Yahoo Finance.
Chartists use an arsenal of indicators to better time buy and sell points. Common signals are MACD, RSI and ATR. However, these signals measure the momentum of price change, with time as a secondary factor.
In 1995, Tushar Chande developed a signal that teases out the time-strength of a trend. He called it Aroon – the name is a Sanskrit word that means “Dawn’s Early Light”, and references the insight the indicator gives to traders in predicting new trends. The indicator, which actually consists of three separate signals, measures the time elapsed from highs or lows over a trailing period.
The three signals are Aroon up, Aroon down and the Aroon oscillator
- Aroon up (aka the bull line) is equal to 100 x (period – number of days since period high) / period
- Aroon down (aka the bear line) is equal to 100 x (period – number of days since period low) / period
This is a plot of Aroon up and down for AAPL (Apple Computers) between 13th September 2013 and 13th September 2014 (with a 25-day period)
If Aroon up (or down) is greater than fifty, then a new high (or low) was reached in the last half-period. That is, with a period of 10 days, if Aroon up is greater than 50, then a new high occurred less than 10 days ago.
Both Aroon up and down decrease as time marches on from a period high or low.
Values of 30 and 70 are points to watch for.
- If Aroon up is over 70, the market is strongly bullish and trending upwards. However, if Aroon up is below 30, the market is only weakly bullish.
- Conversely, if Aroon down is over 70, bears are having a feast with a strong downward market trend. However, Aroon down is below 30, the market is only weakly bearish.
- If Aroon up is over 70, but Aroon down is below 30, then market strength is confirmed, and vice-versa
The Aroon oscillator is simply Aroon up minus Aroon down. This, for example, is a plot of the Aroon oscillator for AAPL from 13th September 2013 to 13th September 2014.
The Aroon oscillator ranges between -100 and 100. Values between -50 and 0 point to a week trend downwards, while values between 0 and 50 indicate a weak trend updates. Values either side of those key points signal a stronger trend.
By varying the period length, the Aroon indicator can give long term indications of trend or short-term indications of trend. By default, the Aroon indicator is 25-periods (shown in the chart above), but a shorter time frame could be 10-periods.
Increase or decreasing the period offers a longer or shorter indication of the trend.