The Aroon indicator is a technical indicator that is used to identify trend changes in the price of an asset.
“Aroon” means “Dawn’s Early Light” in Sanskrit. Chande chose this name because the indicators are designed to reveal the beginning of a new trend. The Aroon Oscillator indicators measure the number of periods since price recorded an x-day high or low. There are two separate indicators: Aroon-Up and Aroon-Down. A 25-day Aroon Up measures the number of days since a 25-day high. A 25-day Aroon Down measures the number of days since a 25-day low.
Aroon Down= 100 * (period – distance to lowest low) / period
How to use:
The indicator is composed of a line that measures the number of periods since a Low.
Generally, it is used with a lookback period of 25.
It is a variation of the AroonUpDown indicator which shows the current difference between the AroonUp and AroonDown value, trying to present a visualization that indicates which is stronger (greater than 0 -> AroonUp and less than 0 -> AroonDown).
- When the 25-period indicator line crosses below 20, it indicates that the stock is moving upwards as the previous low was not seen recently.
BUY: Aroon Down is lesser than 20.
- When the 25-period indicator line crosses above 80, it indicates that the stock is moving downwards as the low was seen recently.
SELL: Aroon Down greater than 80.
Building On Mudrex:
As discussed above, lets first write our entry/exit conditions so that we know what to do:
When the 25-period indicator line crosses below 20, it tells us that the low was formed at least 20 candles ago. Thus it indicates that the stock is moving upwards as the previous low was not seen recently.
BUY: Aroon-Down is lesser than 20.
When the 25-period indicator line crosses above 80, it tells us that the low formed less than 5 candles ago. Thus it indicates that the stock is moving downwards as the low was seen recently.
SELL: Aroon-Down is greater than 80.
Final Strategy: The final strategy on Mudrex looks like this
We can now run a quick back-test to see how our strategy performs.
The main assumption underlying this indicator is that a stock’s price will regularly make new lows in a downtrend. If the assumption proves out to be wrong, this strategy may give us false entries. However, indicators can be proved very effective when combined with other indicators and one can create profitable strategies using Aroon on Mudrex.