What is the Aroon Indicator?
The Aroon (AR) indicator, developed by Tushar Chande in 1995, is a technical indicator used to identify trend changes in the price of a currency, while also identifying the strength of that trend. The AR indicator measures the time between highs and lows over a specified time period.
How to Interpret the AR Indicator
The idea behind the indicator is that strong uptrends will regularly see new highs, and strong downtrends will regularly see new lows, therefore, the indicator will signal when this is happening and when it is not.
The indicator is made up of two lines, one being the “Aroon up” line which measures the strength of the uptrend, and the other being the “Aroon down” line, which measures the strength of the downtrend. If the Aroon up line is above the Aroon down line, it indicates that the currency is showing a bullish signal. When the Aroon down line is above the Aroon up line, it indicates that the currency is showing a bearish signal.
The Aroon up and the Aroon down lines of the indicator fluctuate between 0 - 100, with values closer to 100 indicating a strong trend and values closer to 0 indicating a weaker trend. The lower the Aroon up, the weaker the uptrend and stronger the downtrend and vice versa. The main idea behind the Aroon indicator is that a currency’s price will usually close at new highs during an uptrend, and make new lows in a downtrend.
The AR indicator is calculated using the last 25 periods, but is scaled to 0 and 100, meaning that an Aroon up reading of over 50 indicates that the price made a new high within the last 12.5 periods. A reading close to 100 indicates that a high recently occurred, and the same idea applies to the Aroon down line.
Crossovers may be used to signal entry or exit points. If the Aroon up crosses over the Aroon down, that can indicate a buying signal. If the Aroon down crosses below the Aroon up, that can then indicate a selling signal. If both indicator lines are below 50, that can signal a consolidation in price, which means new highs or new lows are not being created and traders are able to identify breakouts as the next Aroon crossover to indicate which direction price will go.