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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. |
