Hello friends, the number of participants trading in the
financial markets keeps increasing day by day. The Forex market offers us the
opportunity for high returns with a small amount of capital. In order to
succeed in this vast global market, the information we need revolves around
technical analysis. One component of technical analysis is indicators. In the
financial markets, technical indicators are tools used to analyze price
movements and make predictions about future price trends. In this article, we
will discuss one of these technical indicators, the “Aroon indicator”.
What is
the Aroon Indicator?
The Aroon indicator is a technical analysis tool used to
measure the direction and strength of trends in the market. This indicator was created
by well-known financial expert Tushar Chande, who has made significant
contributions to the field of technical analysis tools and indicators in the
financial markets. By providing information about the direction of the current
trend and the strength of the trend, the Aroon indicator provides an extremely
important advantage to those who trade in the market.
The
structure, formation, and calculation of the Aroon Indicator
The Aroon indicator consists of two components, and both
components typically have a value between 0 and 100. If the value is
approaching 0, it is thought that there might be a weak trend or a sideways
market. On the other hand, if the value is approaching 100, it is believed that
a strong trend is present.
Aroon Up (Orange Line). This value measures how long
ago the highest price occurred within a specific period. The Aroon Up value
reflects the duration during which high prices remained high over a certain
period. If the Aroon Up value is high, it indicates a rising trend. Conversely,
if the Aroon Up value is low or close to zero, the trend is weak or the upward
momentum has faded. The formula used to calculate the Aroon Up value is as
follows:
Aroon Up = ((Period - Number of Periods Since Highest
Price) / Period) • 100
Here:
Period represents the number of periods for
which the indicator’s calculation is done (for example, 14 periods).
Number of Periods Since Highest Price explains
in which period the highest price occurred within a specific period.
After calculating this period number, it is substituted into
the formula above. The resulting value reveals the upward strength and duration
of the price trend. A higher Aroon Up value indicates that the price has been
closer to high levels more recently over a specific period, whereas a lower
value signifies that the price reached past high levels a longer time ago.
Aroon Down (Blue Line). This value indicates how long
ago the lowest price occurred within a specific period. The formula used to
calculate the Aroon Down value is as follows:
Aroon Down = ((Period - Number of Periods Since Lowest
Price) / Period) • 100
Here as well:
Period represents the number of periods for
which the indicator’s calculation is done (for example, 14 periods).
Number of Periods Since Lowest Price reveals
in which period the lowest price occurred within a specific period. After
calculating this period number, it is substituted into the formula above.
If the Aroon Down value is high, it reveals signs of a
falling trend. A lower Aroon Down value indicates that the price reached past
low levels a longer time ago.
Aroon Up and Aroon Down values are commonly used in
calculating the Aroon Oscillator. The difference between these two values
creates a value called the Aroon Oscillator:
Aroon Oscillator = Aroon Up - Aroon Down
The Aroon Oscillator is preferred to determine the direction
and strength of the trend.
Trading
with the Aroon Indicator
The Aroon Up and Aroon Down lines move back and forth
between 0 and 100. When both lines are on the chart at the same time, we use
them to figure out if the trend is going up or down. In a common way of using
it, if the Aroon Up line gets close to 100 and the Aroon Down line gets close
to 0, it means the prices are likely going up. On the other hand, if the Aroon
Down line is between 50 and 100, often almost 100, and the Aroon Up line is
between 0 and 50, often almost 0, it shows that prices are probably going down.
When both lines are both below 50 or moving in similar ways, it means there isn’t
a clear trend, and the market is likely moving sideways.
The orange line always reflects the strength of the uptrend.
If the Aroon Up (orange line) crosses above the Aroon Down (blue line) and
stays above it, we place a Buy order. This indicates the start of a
possible uptrend. If the orange line is hovering around values close to 100 (at
this time, the blue line should be near 0), it signifies a strong upward trend.
Take a look at the EUR/CHF chart below.
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| Trading in Forex with the Aroon indicator. |
If the Aroon Down (blue line) crosses above and stays above
the Aroon Up (orange line), we enter a Sell order. This situation
indicates a downtrend. If the blue line is hovering around values close to 100
(at this time, the orange line should be near 0), it signifies a strong
downward trend. This is because the blue line always represents the strength of
the downtrend. See the example EUR/CHF chart above.
Please remember that due to the volatility in
financial markets, there is always a risk of losing your investment. While the
Forex market offers the opportunity for high returns due to leverage, it also
brings the risk of high losses. Therefore, we need to be careful when trading
in financial markets. Using the Aroon indicator alone might not be sufficient
for generating signals. It’s better to combine the Aroon indicator, along with
other technical indicators and fundamental analysis data, to lower risks and
increase our chances of success in trading. Wishing you trading success!