The Aroon Oscillator measures the strength of a trend and is constructed by subtracting Aroon Down from Aroon Up.
Developed by Tushar Chande in 1995, the Aroon is an indicator system that can be used to determine whether the price is trending and if so, how strong the trend is.
“Aroon” means “Dawn’s Early Light” in Sanskrit and Chande chose that name for this indicator since it is designed to reveal the beginning of a new trend.
The Aroon Oscillator oscillates between -100 and +100 with zero as the centerline. It signals an uptrend if it is moving towards its upper limit and a downtrend when it is moving towards the lower limit. The closer the Aroon Oscillator value is to either extreme the stronger the trend is.
The Aroon Oscillator is a single line that is defined as the difference between Aroon(up) and Aroon(down).
All three take a single parameter which is the number of time periods to use in the calculation.
Since Aroon(up) and Aroon(down) both oscillate between 0 and +100, the Aroon Oscillator ranges from -100 to +100 with zero serving as the crossover line.
Aroon(up) for a given time period is calculated by determining how much time (on a percentage basis) elapsed between the start of the time period and the point at which the highest closing price during that time period occurred.
When the price is setting new highs for the time period, Aroon(up) will be 100. If the price has moved lower every day during the time period, Aroon(up) will be zero.
Aroon(down) is calculated in just the opposite manner, looking for new lows instead of new highs.
When Aroon(up) and Aroon(down) are moving lower in close proximity, it signals a consolidation phase is underway and no strong trend is evident.
When Aroon(up) dips below 50, it indicates that the current trend has lost its upward momentum.
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 underway. Values below 30 indicate that a strong trend in the opposite direction is underway.
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.