Aroon

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Aroon Indicator

The Aroon indicator was developed by Tushar Chande in 1995 to determine whether a stock is trending or not, and how strong the trend is. The Aroon Indicator is used in the price technical analysis to indicate moments of possible changes in trend.

The Aroon indicator is represented by two lines - "Aroon (up)" and "Aroon (down)" - which oscillate between 0 and 100 (see the NASDAQ 100 Index chart below).

The Aroon (up) is calculated by means of the following formula:

The Aroon (down) formula is calculated as follows:

For instance, by calculating the 14-period Aroon (up) and Aroon (down) lines on a daily chart:

If the highest price for the past 14 periods (bars or days) was reached 6 periods (bars or days) ago, then the Aroon (up) would be (14-6) / 14 x 100 = 57.

Similarly, if, within the same period of 14 days (14 bars), the lowest price was reached on the previous bar (1 day ago) then the Aroon (down) would be (14-1) / 14 x 100 = 93

Basically, the Aroon indicator represents the time (number of bars or periods) from the beginning of the analyzed period to the bar at which the highest price for Aroon (up) or the lowest price for Aroon (down) occurred as a percentage of the total duration of the analyzed period.

From the formulas above, we can see that whenever a stock closes at a new high, the Aroon (up) will be equal to 100%, while the Aroon (down) will tend to zero. Conversely, whenever the stock closes at a new low, the Aroon (down) will be 100% while the Aroon (up) will tend to zero.

Chart 1: Aroon Indicator

Aroon Oscillator

The Aroon Oscillator is calculated simply by subtracting Aroon(down) from Aroon(up)

Aroon Oscillator = Aroon(up) - Aroon(down)

Because Aroon lines move in a range between 0 and 100, the Aroon Oscillator oscillates around the zero center line between -100 and +100.

Chart 1: Aroon Oscillator

Interpretation

The Aroon lines and Aroon oscillator are used in technical analysis to determine the strength of the current trend.

A high above 70, Aroon (up), indicates a strong uptrend, whereas a high, above 70, Aroon (down), indicates a strong downtrend. At the same time, Aroon values below 50 would indicate a weakening of the trend. Furthermore, when the Aroon oscillator crosses the zero line, you could consider buying (if the oscillator moves up) or selling (if the oscillator moves down).

The Aroon indicator calculations are based on the bar closing price and can be used in a trading system as a price-based valuation of trend strength.

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