Time is money. In the case of the Aroon indicator, this is especially true. This technical analysis tool measures the time it takes for the price to reach its highest/lowest point over a given period of time as a percentage of total time. Aroon is an indicator that falls into the ‘Trend’ category and has recently found its way to the MT4/MT5 trading platform. Read the full article to learn more about this unique analysis tool and ways to use it in practice.
Being a trend indicator, Aroon helps traders identify likely trend reversal points, consolidations, and correction periods. The indicator consists of two lines — the orange ‘Up’ line that measures the number of days since the period-high, and the blue ‘Down’ line that measures the number of days since the period-low. Both lines fluctuate between 0 (lowest point) and 100 (highest point), where values near 0 translate into a weak trend and values near 100 translate into a strong trend. The higher the Up line (and the lower the Down line), the stronger the positive trend. The higher the Down line (and the lower the Up line), the stronger the negative trend. The assumption behind the indicator is simple: for any given asset, its price will close at high during an uptrend and at low during the downtrend. It is somewhat similar to the Directional Movement Index that also measures the trend strength.
How to set up?
Setting up the Aroon indicator is easy. In order to do so, click on the “Indicators” button in the bottom left corner of the screen. Then find Aroon in the “Trend” tab.
Click “Apply” if you want to use the indicator with standard parameters. Note that you can also change the indicator’s period. By increasing the latter, you will make the indicator more sensitive but at the same time increase the number of false alarms. By bringing the period number down, you will increase its precision but at the same time decrease sensitivity. All traders can find their best settings through trial and error. Still, there is nothing wrong with using the indicator with default parameters.
How to use it in trading?
As there are only two lines in this indicator, the signals that it sends are also quite simple. When the orange line crosses above the blue line, the trend can be expected to demonstrate upward movement. When the blue line crosses above the orange line, the trend can be expected to demonstrate a downward movement. In other words, the crossover of the two lines indicates a possible trend reversal. When both are at zero, no strong trend is present on the market.
As most other trend-following indicators, Aroon sends a signal when the initial move in the direction of a new trend has already occurred. It is important to take that into account when trading with this indicator. Aroon Oscillator, an indicator that can be found in the ‘Momentum’ tab of the ‘Indicators’ menu, works in a similar fashion. It has only one line, that is calculated by subtracting the Aroon Up line from the Aroon Down line. When Aroon Oscillator is above the middle line, the asset is believed to have a bullish bias. When Aroon Oscillator is below the middle line, the asset is believed to have a bearish bias.
Things to remember
Remember that just as any indicator, Aroon can and will make false predictions. Professional traders would recommend using it as a part of a more complex trading system. You could, for example, combine it with one of the volatility, volume or momentum indicators for better results and higher overall accuracy.
