The Aroon Indicator Explained

Definition

Tushar Chande’s Aroon indicator detects the formation of a new trend as well as the momentum of such a trend. You can download the Aroon indicator here.

Components of the Aroon Indicator

The Aroon indicator is made up of two components:

  1. The Aroon Up
  2. The Aroon Down


The two components are drawn as two lines, or sometimes as an oscillator which represents the difference between both Aroon components. If the Aroon indicator window features the AroonUp and AroonDown lines, the calibration is between 0 and 100. If the oscillator is used, then the calibration is between -100 and +100.

Aroon_Oscillator

The AroonUp values rise close to 100 when the asset has attained a trend top for a time period, and will be closer to zero when the value of the asset has dropped dramatically for a time period. The AroonDown is calculated the same way, but this time will be looking for lows.

The Aroon Oscillator is designed to detect trends and is calculated by deducting the AroonDown from the AroonUp. The zero line is the benchmark for trend detection. An uptrend is seen with values above zero and a downtrend is seen when values fall below zero. The distance of the oscillator from the zero line determines the strength of the trend. A stronger trend is seen when the oscillator is farthest from the zero line.

According to Chande, whenever the components of the Aroon indicator are in close proximity, this is a sign of market consolidation. AroonUp measures the uptrend, and AroonDown measures the downtrend. When AroonUp or AroonDown values drop below 50, this indicates loss of upward and downside momentum respectively.  Values above 70 are signs of a strong trend for either component, while values that are less than 30 show that primary trend is weakening and opposing trend is picking up.

Indicator Settings

The Aroon indicator is a customized indicator which must be downloaded and attached to the Indicator folder of the MT4 client. To attach this indicator, go to the platform interface and click on File -> Open Data Window -> MQL4 -> Indicators.

Aroon

To attach the Aroon Indicator subsequently to the MT4 chart, click on Insert -> Indicators -> Custom -> Aroon Indicator. To download the Aroon indicator, click on this link.

The indicator line of the Aroon indicator can be enhanced by either increasing the line thickness or by changing the colour of the indicator to make it more visible.

Usage of the Aroon Indicator in Forex Trading

The Aroon indicator was basically designed to be a trend seeker, and to quantify the strength of such trends. The indicator was not designed for divergence trading so it will not be used in such activity.

Trend Indicator

We will be looking for chart setups that point towards a trend, and then use the Aroon indicator to confirm any trade moves that follow these trends. There is a zero line which demarcates the negative part of the Aroon oscillator from the positive part. Once the Aroon is crossing from positive to negative, this is a bearish sign and should alert the trader to a possible short trade. Likewise, the cross of the Aroon oscillator from negative to positive is also indicative of a long trade.

The Aroon indicator can be used to confirm a setup on the chart. In this case, we shall display two instances where the Aroon indicator confirmed two chart setups.

The first is a long trade setup where the Aroon indicator shows the AroonDown situation. The chart pattern that formed on the chart was a bearish pennant, which is a bearish continuation chart pattern. At the time that the candlestick in view broke the pennant trend lines, the AroonDown indicator was showing on the indicator window. This confirms the signal to go short.

 Aroonsell

 

In this case, the Take Profit would be set at a level where the AroonDown reaches oversold levels, meaning that the trade no longer has the momentum to keep going south.

The second situation shows a falling wedge on the chart, with the AroonUp indicator showing on the indicator window. At the time the price action broke through the upper border of this wedge, the AroonUp was fully at work. This confirms the upside momentum of the trade.

Aroonbuy

The trade is closed when the AroonUp reaches the overbought area, showing that the upside move may no longer have enough momentum to keep heading north. Even though it eventually did in this trade example, the gold standard is not to assume that this will be the case all the time. So the AroonUp in an overbought position is used as the signal to exit the trade.

Conclusion

There are other chart setups that can be used in conjunction with the Aroon indicator. Make sure you practice how to trade each setup on a demo account before using the indicator to trade real money. Also pay attention to risk management.

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