The Aroon indicator was developed by Tushar Chande. Aroon is Sanskrit word meaning "dawn's early light" or the change from night to day. The Aroon indicator allows you to anticipate changes in security prices from trending to trading range. The indicator uses two lines: Aroon Up and Aroon Down. Aroon Down is a measure of how close the current bar is to the most recent lowest Low bar found in the last N bars. Aroon Up is a measure of how close the current bar is to the most recent highest High bar found in the last N bars. Additionally Aroon oscillator can be defined as the difference between the Aroon Up and Aroon Down indicators.
Aroon indicator ranges from 0 to 100 and it is drawn with additional 30/70 levels. The default period is 14 days. The indicator works as follows: if a security makes a new 14-day high, the Aroon Up = 100; when the security makes a new 14-day low, the Aroon Down = 100; when there was no new high in 14 days, the Aroon Up = 0; and consequently when there was no new low for 14 days, the Aroon Down = 0.
Aroon indicator is an another way (in addition to the ADX indicator) of detemining if market is trending or not.
Period (25) - the number of bars, or period, used to calculate the study.
Technically, the formula for Aroon(up) is:
[ [ (# of periods) - (# of periods since highest high during that time) ] / (# of periods) ] x 100
For example, consider plotting a 10-period Aroon(up) line on a daily chart. If the highest price for the past ten days occurred 6 days ago (4 days since the start of the time period), Aroon(up) for today would be equal to ((10-6)/10) x 100 = 40.
Aroon(down) is calculated in just the opposite manner, looking for new lows instead of new highs. When a new low is set, Aroon(down) is equal to +100. For each subsequent period that passes without another new low, Aroon(down) moves down by an amount equal to (1 / # of periods) x 100.
The formula for Aroon(down) is:
[ [ (# of periods) - (# of periods since lowest low during that time) ] / (# of periods) ] x 100
Continuing the example above, if the lowest price in that same ten-day period happened yesterday (i.e. on day 9), Aroon(down) for today would be 90.
Chande states that when Aroon(up) and Aroon(down) are moving lower in close proximity, it signals that a consolidation phase is under way and no strong trend is evident. When Aroon(up) dips below 50, it indicates that the current trend has lost its upward momentum. Similarly, when Aroon(down) dips below 50, the current downtrend has lost its momentum. Values above 70 indicate a strong trend in the same direction as the Aroon (up or down) is under way.
The Aroon Oscillator signals an upward trend is underway when it is above zero and a downward trend is underway when it falls below zero. The farther away the oscillator is from the zero line, the stronger the trend.
In some ways, Aroon is similar to Wilder's DMI system (and the Aroon Oscillator is similar to Wilder's ADX line). However, the Aroon is constructed in a completely different manner. Divergences between the two systems may be very instructive.
How to Use Aroon Up/Down
- If price makes a new 14-day high, the Aroon Up = 100.
- If price makes a new 14-day low, the Aroon Down = 100.
- If price does not make a new high in 14 days, the Aroon Up = 0
- If price does not make a new low for 14 days, the Aroon Down = 0.
Similar to the ADZ indicator, the Aroon indicator is used to determine if the market is trending or not.
A related technical indicator, the Aroon Oscillator can be defined as the difference between the Aroon Up and Aroon Down values.