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Technical Analysis, Studies, Indicators:
Aroon Indicator and Aroon Oscillator

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Aroon Indicator

The Aroon indicator has been 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 the 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 Nasdaq 100 index chart below).

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

Respectively the Aroon(down) formula is :

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

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

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

Basically, Aroon indicator represents the amount of time (number of bars or periods in percentage) between the beginning of the analyzed period and the bar at which the highest price for Aroon(up) and the lowest price for Aroon(down) during that time period occurred.

From the formulas above, we may see that each time when the stock closes at a new high, the Aroon(up) will be equal to 100%, while Aroon(down) would be tending to zero. Respectively each time when the stock closes at a new low the Aroon(down) will be 100% while Aroon(up) would be tending 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 the range between 0 and 100, the Aroon Oscillator oscillates around zero center line in a scale between -100 and +100.

Chart 1: Aroon Oscillator

Interpretation

The Aroon lines and Aroon oscillator are used in technical analysis to determine how strong the current trend is.

The high, above 70, Aroon(up) indicates a strong up trend. Respectively the high, above 70, Aroon(down) values would indicate the strong down trend. At the same time Aroon values below 50 would indicate weakening of the trend. Furthermore, the moments when the Aroon oscillator crossovers zero line could be considered for buying (if the oscillators move up) or selling (if the oscillators move down).

The Aroon indicator calculations are based on the bar close price and it could be used in a trading system as a price based valuation of a trend strength.

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