What is the Aroon indicator?
The Aroon indicator is a trend finding indicator consisting of two lines, Aroon up and Aroon down. Aroon up measures the strength of the the uptrend and Aroon down measures the strength of the downtrend. The two lines move between a range of 0 to 100, 0 indicating a weak trend and 100 indicating a strong trend.
How is the Aroon indicator calculated?
The Aroon indicator measures how recent the latest highs and lows were. The closer the indicator is to 100 the more recent the highs and lows were and the closer the indicator is to 0 the less recent the lows and highs were. This means when the Aroon down is at zero it has been a while since a low has been formed and when the Aroon up is close to 100 there has been recent highs which are likely to continue.
Aroon up = ((number of periods) – (number of periods since highest high) divided by (number of periods)) x 100
Aroon down = ((number of periods) – (number of periods since lowest low) divided by (number of periods)) x 100
How to trade the Aroon indicator?
The simplest way to trade the Aroon indicator is to wait for a crossover of the Aroon up and Aroon down indicator, when Aroon up crosses above Aroon down it is a sign to buy as this shows a uptrend and when the Aroon down crosses above the Aroon up it is a sign to sell as this shows a downtrend has formed. For better confirmation that a trend has reversed it is best to wait for a cross over above 50 on the Aroon indicator, also if the indicators continue to move in the crossed direction and touch the 0 and 100 marks this confirms the trend it strong. You can exit the trade either when the indicators move from the 0 and 100 or exit on the next crossover.
Another more conservative way to trade the Aroon indicator is to wait for the Aroon up and down lines to hit 0 and 100, e.g. Aroon up touching 100 meaning a strong uptrend has formed and Aroon down touching 0 showing very weak sellers going against the uptrend. You can then either exit the trade when the indicators move from the 0 and 100 or exit on the next crossover.