The Aroon Up/Down technical indicator identifies when the price is in a trend or trading sideways.
It was developed by Tushar Chande, who used the word “Aroon” due to its meaning in Sanskrit: “dawn’s early light” or “the change from night to morning”.
The indicator uses two lines: Aroon Up and Aroon Down.
- Aroon Down is a measure of how close the current bar is to the most recent lowest Low bar found in the last N bars.
- Aroon Up is a measure of how close the current bar is to the most recent highest High bar found in the last N bars.
The Aroon Up/Down indicator ranges from 0 to 100.
The default period is 14 days.
How to Use Aroon Up/Down
- If the price makes a new 14-day high, the Aroon Up = 100.
- If the price makes a new 14-day low, the Aroon Down = 100.
- If the price does not make a new high in 14 days, the Aroon Up = 0
- If the price does not make a new low for 14 days, the Aroon Down = 0.
Similar to the ADZ indicator, the Aroon indicator is used to determine if the market is trending or not.
A related technical indicator, the Aroon Oscillator can be defined as the difference between the Aroon Up and Aroon Down values.
The Difference Between the Aroon Indicator and the Directional Movement Index (DMI)
The Aroon indicator works a bit like the Directional Movement Index (DMI) created by Welles Wilder. Both use lines to show which way a trend is going—up or down. But here’s the difference: The Aroon indicator looks more at how much time passes between highs and lows. On the other hand, the DMI is more about comparing the price of current highs and lows with past ones. So, while the DMI focuses on price, the Aroon indicator is more about time.
Limitations of Using the Aroon Indicator
The Aroon indicator can sometimes show when it’s a good time to buy or sell, but it doesn’t always get it right. It might tell you to buy or sell after the price has already changed a lot. This happens because the indicator looks back at what happened before, instead of predicting what will happen next.
Even if the Aroon indicator shows a crossover, it doesn’t mean the price will go up or down a lot. The indicator only looks at how many days it’s been since the price reached a high or low, not how big the price changes are. So, even if the price stays almost the same, the indicator will still show crossovers because eventually, there will be a new high or low within the last 25 days.
Traders should also look at the actual price movement and maybe use other indicators to make smart trading choices. Relying only on one indicator isn’t the best idea.
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