What is Aroon?
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 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 Indicator Formula
The Aroon Oscillator is the difference between the bullish Aroon (Aroon Up) and the bearish Aroon (Aroon down).
AROON Oscillator =Aroon Up – Aroon down
How to Calculate Aroon Indicator
The two separate indicators in the Aroon Indicator are calculated as follows.
Aroon Up, the bullish Aroon is calculated by:
Aroon Up= 100 * (period – distance to highest high) / period
Aroon Down, the bearish Aroon is calculated by:
Aroon Down= 100 * (period – distance to lowest low) / period
Why use Aroon Oscillator Trading Strategy?
The Aroon indicators fluctuate between 0-100, indicating weak and strong trends respectively. Lower the value of Aroon Up, the weaker the uptrend and stronger the downtrend, and vice versa.
Using crossovers in the Aroon Oscillator Trading Strategy, one can receive entry and exit points. Up crossing above Down can be a signal to buy. Down crossing below Up may be a signal to sell.
How To Use The Aroon Oscillator Trading Strategy
The Aroon Oscillator is a trend-following indicator that uses aspects of the Aroon Indicator to gauge the strength of a current trend.
It shows the current difference between the AroonUp and AroonDown value, trying to present a visualization which indicates which is stronger (greater than 0 -> AroonUp and less than 0 -> AroonDown).
The Aroon Oscillator can generate trade signals or provide insight into the current trend direction of an asset.When the oscillator moves above the zero line it means the Aroon Up is crossing above the Aroon Down. This means the price has made a high more recently than a low.
BUY:Aroon oscillator greater than 0.
When the oscillator moves below zero, it means the Aroon Down is crossing below the Aroon Up. A low occurred more recently than a high, which could signal a downtrend is starting.
SELL:Aroon oscillator lesser than 0.
Building Aroon Trading Strategy on Mudrex
As discussed above, lets first write our entry/exit conditions so that we know what to do:
When the oscillator moves above the zero line it means the Aroon Up is crossing above the Aroon Down. This means the price has made a high more recently than a low.
BUY: Aroon oscillator greater than 0.
When the oscillator moves below zero, it means the Aroon Down is crossing below the Aroon Up.
SELL: Aroon oscillator lesser than 0.
Final Strategy: The overall 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 and new highs in an uptrend.If the assumption proves out to be wrong , this strategy may give us false entries.However indicator can be proved very effective when combined with other indicators and one can create profitable strategies using Aroon on Mudrex.