Finding The Trend With Aroon

Sign In • Register • Free Annual Reports • Free Tools

Search Investopedia

Enter Symbol

Dictionary

Investing

Markets

Personal Finance

Active Trading

Forex

Professionals

Tutorials

Video

Simulator

Free Newsletters

 

Fundamentals

Charts & Patterns

Technical Indicators

Trading Strategies

Brokers

Software

Options & Futures

Chart Advisor

Discount Brokers

Finding The Trend With Aroon
Follow Us: February 18 2009| Filed Under » Aroon, Technical Analysis, Technical Indicators, Trend Trading In 1995 Tushar Chande, a principal of Tuscarora Capital Management and author of "The New Technical Trader" (1994) and "Beyond Technical Analysis" (2001), developed the Aroon indicator to determine trend direction and strength. The indicator's greatest value is in helping traders and investors to distinguish whether a long-term trend is ending or simply stalling before another move. This article will show you how to calculate and apply the Aroon indicator to your own trading. Calculating Aroon The Aroon indicator can be calculated using the following formula: Bullish - [(# of periods) - (# of periods since highest high)] / (# of periods)] x 100 Bearish - [(# of periods) - (# of periods since lowest low)] / (# of periods)] x 100

Marketplace
If we take a look at these formulas, it is apparent that they are both looking at how recent the latest highs and lows were. Higher Aroon values indicate more recent highs and lows, while lower values indicate less recent highs and lows. Moreover, the Aroon values oscillate between 100 and 0 a higher number indicates a stronger trend and vice versa. The two Aroon indicators (bullish and bearish) can also be made into a single oscillator by making the bullish indicator 100 to 0 and the bearish indicator 0 to -100 and finding the difference between the two values. This oscillator then varies between 100 and -100, with 0 indicating no trend. Using the Aroon Indicator The Aroon indicator is used by plotting the bullish and bearish versions on the same sub-chart, or by plotting the oscillator on a single sub-chart. The key to successfully using the Aroon indicators lies in watching two things: Indicator Movements Around the Key Levels, 30 and 70 - Movements above 70 indicate a strong trend, while movements below 30 indicate low trend strength. Movements between 30 and 70 indicate indecision. For example, if the bullish indicator remains above 70 while the bearish indicator remains below 30, the trend is definitively bullish. Crossovers Between the Bullish and Bearish Indicators - Crossovers indicate confirmations if they occur between 30 and 70. For example, if the bullish indicator crosses above the bearish indicator, it confirms a bullish trend. Let's take a look at an example:
Penny Stock of the Day Monitor Your Credit Open an IRA in 15 minutes or less

Related Articles
Forces Behind Interest Rates

Consumer Confidence: A Killer Statistic What Type Of Trader Are You?

Sell In May – Yay Or Nay?

Trading Is Timing

http://www.investopedia.com/articles/trading/06/aroon.asp[8/20/2013 4:00:11 PM]

Finding The Trend With Aroon

Trading Center

Partner Links
Retirement Income Planning Tool

Figure 1 Here we have an example of Titanium Metals (TIE), a stock that recently trended strongly on increased demand for titanium. Notice that when the Aroon indicators were on opposite ends of the 30-70 barriers, the price was in a strong trend. Also note that when crossovers occurred within the 30-70 barriers, it often signaled a confirmation of the new trend. The Aroon oscillator is a bit simpler, but provides less information. The key levels to watch are 50, 0 and -50. When the oscillator moves above 50, it indicates a strong bullish trend. When it hovers around 0, it indicates the lack of a definitive trend. And finally, when it breaks below -50, it indicates a strong bearish trend. Let's take a look at the same chart using the oscillator:

Figure 2 Here we can see very similar information but with a lack of confirmations because there is no crossover possible with an oscillator. It is important to realize when looking at these charts that the Aroon indicator is lagging and, therefore, is susceptible to sharp price drops or increases. Therefore, it is very important to use other methodologies in order to exit prudently. For example, watching for high volume reversal candles is a good way to get out at the right point in the event of a sharp price reversal. Stop-loss points set at key support levels are another good way to control risk.

http://www.investopedia.com/articles/trading/06/aroon.asp[8/20/2013 4:00:11 PM]

Finding The Trend With Aroon

Investors may prefer the oscillator because it is easier to read and tends to have less contradictory signals. Meanwhile, active traders may appreciate the additional information given by the two indicators. It is up to you to determine which methodology works best for your needs and apply it to your own trading. They both offer an excellent way to determine whether a trend exists, and how strong that trend is. Conclusion The Aroon indicator is used best by traders and investors interested in whether or not a trend is still intact. It can help traders avoid inefficient use of capital by allowing them to seek other opportunities during sideways markets and only hold positions during strong trends. However, it is important to watch carefully and analyze stocks using other studies in conjunction with Aroon to avoid the primary weakness in this system - sharp price movements.

Try Our Stock Simulator!
Test your trading skills!

Sign Up For Our Chart Advisor Newsletter!

Enter your email here...

Sign Up!

by

Justin Kuepper
Justin Kuepper has many years of experience in the market as an active trader and a personal retirement accounts manager. He spent a few years independently building and managing financial portals before obtaining his current position with Accelerized New Media, owner of SECFilings.com, ExecutiveDisclosure.com and other popular financial portals. Kuepper continues to write on a freelance basis, covering both finance and technology topics.

1 comment

0

Leave a message...

Best

Community

Share

Heitor Paulo

10 months ago

Very instructive. Thanks.
2

△ ▽

Reply

Share ›

ALSO ON INVESTOPEDIA

AROUND THE WEB

What's this?

The AMD Story Sounds Very Familiar (AMD,INTC,NVDA,SNE,MSFT) 11 comments What's The Glide Path For Apple's Margins? 4 comments How Bitcoin Works
5 comments

Citizens Over 50 May Qualify to Get $20,500 this Year Moneynews Flirting Guide for Women: Because Men Miss So Many Signals Lifescript Don't Get Alzheimer's: Here's What May Cause It Newsmax Health Secret to a Gorgeous Face: It's the Eyebrows eHow Style

Fear Dominating The Broadcom Story
2 comments

Dictionary

Investing

Markets

Personal Finance

Active Trading

Forex

Professionals

Tutorials

Video

Simulator

Free Tools

 

http://www.investopedia.com/articles/trading/06/aroon.asp[8/20/2013 4:00:11 PM]

Finding The Trend With Aroon

 

Content Library Articles Tutorials Slideshows FAQs Calculators Chart Advisor StockAnalysis

Work With Investopedia License Our Dictionary Advertise With Us Email Campaign Deployment About Our Writers Write For Us Contact Us Careers

Sponsors & Partners Free Annual Reports CanDoFinance Newsletters Sign up for our FREE e-Newsletters

© 2013, Investopedia US, A Division of ValueClick, Inc. All Rights Reserved | Terms Of Use | Privacy Policy

http://www.investopedia.com/articles/trading/06/aroon.asp[8/20/2013 4:00:11 PM]