Aroon Indicators for Metatrader 4

Example: Aroon shown on a ProRealTime Chart

What is the Aroon indicator?

The Aroon indicator serves as a technical analysis tool designed to assess the strength of trends and fluctuations in the price of a given asset. It assists in determining whether the price is experiencing a trending movement or is confined within a trading range. Additionally, it can signal the onset of a new trend and transitions from trading ranges to trending phases.

Fundamentally, the Aroon indicator evaluates the intervals between the occurrence of highs and the occurrence of lows within a defined timeframe.

The underlying principle is that robust upward trends consistently achieve new highs, while strong downward trends frequently reach new lows; the Aroon indicator effectively indicates when these conditions are met and when they are not.

History

The Aroon Indicator was developed in 1995 by technical analyst and author Tushar Chande. The fact that he named the indicator “Aroon” which is Sanskrit for “Dawn’s Early Light” demonstrates his belief in his indicator’s trend discovery capabilities.

Calculation of the Aroon indicator

The Calculation relies on a user-defined period.

For this example we will use a 14 Day Aroon.

• Aroon-Up = ((14 - Days Since 14-day High)/14) x 100
• Aroon-Down = ((14 - Days Since 14-day Low)/14) x 100

The basics of Aroon

The Aroon Indicator is range bound, techncial indicator that produces numbers between 0 and 100.

The technical analyst should focus on three areas on that scale.

Close to or at 100 indicates a stronger trend.

Close to or at 0 indicates a weaker trend.

The area right around 50 is middle ground and the trend could go either way.

When Aroon-Up is above 50 and close to 100 and Aroon-Down is below 50, this is a good indication of a strengthening uptrend. Likewise when Aroon-Down is above 50 and close to 100 and Aroon-Up is below 50, a strengthening downtrend may be at hand.

What to look for

Trend Spotting

Aroon's major function is to identify new trends as they happen. There are three steps to identifying when a new trend could be forming:

• The Aroon-Up and the Aroon-Down cross each other.
• The Aroon Lines continue in opposite directions with one going above 50 towards 100 and the other staying below 50.
• One of the Aroon Lines touches 100 or 0

Based on those three steps, lets use a Bullish Trend as an example. In a Bullish Trend, The Aroon-Up and the Aroon-Down will cross. Then, the Aroon-Up will cross above 50 while the Aroon-Down crosses below 50. Finally the Aroon-Up will nit 100 signifying the emergence of a Bullish Trend.

Consolidation Periods

Another good function of the Aroon Indicator is its ability to identify periods of consolidation. This occurs when Both the Aroon-Up and the Aroon-Down have dropped below 50. This shows a period of sideways trading because neither the Bullish Trend nor Bearish Trend has any strength. This is especially true when both the Aroon-Up and the Aroon-Down are moving down in unison. When both drop in a parallel manner, a sideways trading range may be forming. 

Summary

The Aroon Indicator (Aroon Up Down) is most definitely a very good indicator for identifying both trends as well as periods of consolidation. That being said, it is an indicator best used a complementary piece. Knowing the overall trend is an important part to any trading strategy. Using Aroon as a foundation and combining it with additional indicators which are used to generate signals is probably the most effective way to use Aroon.

Knowing the overall trend is an important part to any trading strategy.