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Aroon
Description
The Aroon indicator was developed by Tushar Chande. Aroon is a
Sanskrit word meaning “dawn’s early light” or the change from night
to day. The Aroon indicator allows you to anticipate changes in
security prices from trending to trading range. For more information
on the Aroon indicator see the article written by Tushar Chande in
the September 1995 issue of Technical Analysis of Stocks &
Commodities magazine.
These changes are anticipated by measuring the number of periods
that have passed since the most recent x-period high and x-period
low. Therefore, the Aroon indicator consists of two plots; one
measuring the number of periods since the most recent x-period high
(Aroon Up) and the other measuring the number of periods since the
most recent x-period low (Aroon Down).
The actual plotted value is a “stochastic” like scale ranging from 0
to 100. Assuming a default time-period of 14 days, if a security
makes a new 14-day high, the Aroon Up = 100; when the security makes
a new 14-day low, the Aroon Down = 100. When the security has not
made a new high for 14 days, the Aroon Up = 0; when the security has
not made a new low for 14 days, the Aroon Down = 0.
As explained in the interpretation section for the
VHF indicator the age-old problem for
many trading systems is their inability to determine if a trending
or trading range market is at hand. Trend-following indicators such
as MACD and moving averages, tend to be whipsawed as markets enter a
non-trending congestion phase. On the other hand,
overbought/oversold oscillators (which work well during trading
range markets) tend to overreact to price pull-backs during trending
markets—thereby closing a position prematurely. The Aroon indicator
attempts to remedy this by helping you determine when
trend-following or overbought/oversold indicators are likely to
succeed.
Interpretation
There are basically three conditions that you look for when
interpreting the Aroon indicator: extremes at 0 and 100, parallel
movement between Aroon Up and Aroon Down, and crossovers between
Aroon Up and Aroon Down.
- Extremes: When the Aroon Up line reaches 100,
strength is indicated. If the Aroon Up remains persistently
between 70 and 100, a new uptrend is indicated. Likewise if the
Aroon Down line reaches 100, potential weakness is indicated. If
the Aroon Down remains persistently between 70 and 100, a new
downtrend is indicated.
A strong uptrend is indicated when the Aroon Up line
persistently remains between 70 and 100 while the Aroon Down
line persistently remains between 0 and 30. Likewise a strong
downtrend is indicated when the Aroon Down line persistently
remains between 70 and 100 while the Aroon Up line persistently
remains between 0 and 30.
- Parallel Movement: When the Aroon Up and Aroon Down
Lines move parallel with each other (are roughly at the same
level), then consolidation is indicated. Expect further
consolidation until a directional move is indicated by an
extreme level or a crossover.
- Crossovers: When the Aroon Down line crosses above
the Aroon Up line, potential weakness is indicated. Expect
prices to begin trending lower. When the Aroon Up line crosses
above the Aroon Down line, potential strength is indicated.
Expect prices to begin trending higher.
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