ChartSchool » Technical Indicators and Overlays » Aroon

Introduction
Developed by Tushar Chande in 1995, Aroon is an indicator system that determines
whether a stock is trending or not and how strong the trend is. “Aroon” means “Dawn's
Early Light” in Sanskrit. Chande chose this name because the indicators are designed to
reveal the beginning of a new trend. The Aroon indicators measure the number of periods
since price recorded an x-day high or low. There are two separate indicators: Aroon-Up
and Aroon-Down. A 25-day Aroon-Up measures the number of days since a 25-day high. A
25-day Aroon-Down measures the number of days since a 25-day low. In this sense, the
Aroon indicators are quite different from typical momentum oscillators, which focus on
price relative to time. Aroon is unique because it focuses on time relative to price. Chartists
can use the Aroon indicators to spot emerging trends, identify consolidations, define
correction periods and anticipate reversals.

Calculation
The Aroon indicators are shown in percentage terms and fluctuate between 0 and 100.
Aroon-Up is based on price highs, while Aroon-Down is based on price lows. These two
indicators are plotted side-by-side for easy comparison. The default parameter setting in
SharpCharts is 25 and the example below is based on 25 days.
Aroon-Up = ((25 - Days Since 25-day High)/25) x 100
Aroon-Down = ((25 - Days Since 25-day Low)/25) x 100
Aroon declines as the elapsed time between a new high or low increases. 50 is the cutoff
point. Because 12.5 days marks the exact middle, a reading of exactly 50 is impossible on a
daily chart. It is possible with other timeframes. On daily charts, Aroon is either below 50
(48) or above 50 (52). A reading above 50 means a new high or low was recorded within
the last 12 days or less. This is the most recent half of the look-back period. A reading
below 50 means a new high or low was recorded within the last 13 days or more {(25-
13)/25 x 100 = 48). This is the latter half of the look-back period. The table below shows
the range of values for 25-day Aroon-Up and 25-day Aroon-Down
Interpretation
The Aroon indicators fluctuate above/below a centerline (50) and are bound between 0
and 100. These three levels are important for interpretation. At its most basic, the bulls
have the edge when Aroon-Up is above 50 and Aroon-Down is below 50. This indicates a
greater propensity for new x-day highs than lows. The converse is true for a downtrend.
The bears have the edge when Aroon-Up is below 50 and Aroon-Down is above 50.
A surge to 100 indicates that a trend may be emerging. This can be confirmed with a
decline in the other Aroon indicator. For example, a move to 100 in Aroon-Up combined
with a decline below 30 in Aroon-Down shows upside strength. Consistently high readings
mean prices are regularly hitting new highs or new lows for the specified period. Prices are
moving consistently higher when Aroon-Up remains in the 70-100 range for an extended
period. Conversely, consistently low readings indicate that prices are seldom hitting new
highs or lows. Prices are NOT moving lower when Aroon-Down remains in the 0-30 range
for an extended period. This does not mean prices are moving higher though. For that, we
need to check Aroon-Up.

New Trend Emerging

There are three stages to an emerging trend signal. First, the Aroon lines will cross.
Second, the Aroon lines will cross above/below 50. Third, one of the Aroon lines will reach
100. For example, the first stage of an uptrend signal is when Aroon-Up moves above
Aroon-Down. This shows new highs becoming more recent than new lows. Keep in mind
that Aroon measures the time elapsed, not the price. The second stage is when Aroon-Up
moves above 50 and Aroon-Down moves below 50. The third stage is when Aroon-Up
reaches 100 and Aroon-Down remains at relatively low levels. The first and second stages
do not always occur in that order. Sometimes Aroon-Up will break above 50 and then
above Aroon-Down. Reverse engineering the uptrend stages will give you the emerging
downtrend signal. Aroon-Down breaks above Aroon-Up, breaks above 50, and reaches
100.

The chart above shows CSX Corp (CSX) with weekly bars and 25-week Aroon. First, notice
that the downtrend began weakening as Aroon-Down declined below 50 at the end of
2007 (far left). The first stage of an uptrend was signaled when Aroon-Up moved above
Aroon-Down in early 2008 (first orange circle). Aroon-Up continued above 50 and hit 100
as Aroon-Down remained at relatively low levels. Notice how Aroon-Up remained near
100 as the advance continued. This emerging uptrend signal lasted until September 2008
when Aroon-Down broke above Aroon-Up, exceeded 50 and surged to 100 (second orange
circle). Notice how Aroon-Down remained near 100 as the downtrend extended. The third
trend on this chart was signaled when Aroon-Up surged to 100 in June 2009 and
remained above 50 for over a year (third orange circle). Also, notice that Aroon-Down
remained below 50 for over a year.

Consolidation Period
The Aroon indicators signal a consolidation when both are below 50 and/or both are
moving lower with parallel lines. It makes sense that consistent readings below 50 are
indicative of flat trading. For 25-day Aroon, readings below 50 mean a 25-day high or low
has not been recorded in 13 or more days. Prices are clearly flat when not recording new
highs or new lows. Similarly, a consolidation is usually forming when both Aroon-Up and
Aroon-Down move lower in parallel fashion and the distance between the two lines is quite
small. This narrow parallel decline indicates that some sort of trading range is forming.
The first Aroon indicator to break above 50 and hit 100 will trigger the next signal.
The chart above shows Omnicom (OMC) with the Aroon indicators moving below 50 in a
parallel decline. The width of the channel could be narrower, but we can see the
consolidation taking shape on the price chart for confirmation. Both Aroon-Up and Aroon-
Down were below 50 in the yellow area. Aroon-Up then broke out and surged to 100,
which was before the breakout. Further confirmation came with another Aroon-Up surge
at the breakout point. This surge/breakout signaled the end of the consolidation and the
beginning of the advance.
The next chart shows Lifepoint Hospitals (LPNT) with 25-day Aroon. Both lines moved
lower in May with a parallel decline. The distance between the lines was around 25 points
throughout the decline. Aroon-Up and Aroon-Down flattened in June and both remained
below 50 for around two weeks as the triangle consolidation extended. Aroon-Down (red)
was the first to make its move with a break above 50 just before the triangle break on the
price chart. Aroon-Down hit 100 as prices broke triangle support to signal a continuation
lower.

Conclusions
Aroon-Up and Aroon-Down are complementary indicators that measure the
elapsed time between new x-day highs and lows, respectively. They are shown
together so chartists can easily identify the stronger of the two and determine the trend
bias. A surge in Aroon-Up combined with a decline in Aroon-Down signals the emergence
of an uptrend. Conversely, a surge in Aroon-Down combined with a decline in Aroon-Up
signals the start of a downtrend. A consolidation is present when both move lower in
parallel fashion or when both remain at low levels (below 30). Chartists can use the Aroon
indicators to determine if a security is trending or trading flat and then use other
indicators to generate appropriate signals. For example, chartists might use a momentum
oscillator to identify oversold levels when 25-week Aroon indicates that the long-term
trend is up.

Using with SharpCharts

The Aroon indicators are available on SharpCharts as an indicator. Simply choosing
“Aroon” will display Aroon-Up and Aroon-Down. These indicators can be positioned
above, below or behind the price plot of the underlying security. Users can click on the
green arrow to the right of the indicator to see advanced options and add a horizontal line
at 50. Users can even apply another indicator to the Aroon indicators. Click here for a
live chart with the Aroon indicators.

Suggested Scans

Aroon-Up and Aroon-Down are below 20

This simple scan searches for stocks where Aroon-Up and Aroon-Down are both below 20.
A consolidation is often present when both indicators are at such low levels. The first to
break above 50 indicates the next directional clue.
[type = stock] AND [country = US]
AND [Daily SMA(20,Daily Volume) > 100000]
AND [Daily SMA(60,Daily Close) > 20]

AND [Daily Aroon Up(25) < 20]

AND [Daily Aroon Down(25) < 20]
For more details on the syntax to use for Aroon scans, please see our Scanning Indicator
Reference in the Support Center.
Trading Tuitions > Categories > General > Aroon Indicator: Stay with the Trend
Aroon Indicator: Stay with the Trend
Posted on December 28, 2016 by admin

Aroon is a Sanskrit word that means ‘Dawn’s Early Light‘. Developed by Tushar Chande, author of the famous
book ‘Beyond Technical Analysis‘, this indicator signals the start of a new trend at a very early stage. The trend may
be a uptrend or downtrend. The methodology for the calculation of Aroon Indicator makes it unique and innovative.
While most of the indicators are based on Price or volume, Aroon is based on Time. Aroon Indicator is calculated
based on the number of periods passed since X days high or low. Aroon Up indicator measures the number of
periods from X days high in percentage terms, while Aroon Low indicator measures the number of periods from X
days low. It is a very popular indicator among technical analysts and used in conjunction of other indicators to
successful identify trends.

Aroon Indicator Calculation

Below is the simplest formula to calculate Aroon Up and Down indicator:
Aroon Up = ((X – Days Since X-day High)/X) x 100
Aroon Down = ((X – Days Since X-day Low)/X) x 100
The default value of X is 25 periods. The value of Aroon up and down fluctuates between 0 to 100. Higher Aroon
values indicate more recent highs and lows, while lower values indicate less recent highs and lows.

Aroon Indicator Interpretation

Below is the chart with Aroon Indicator embedded:

The Red line represents Aroon up indicator while Blue line represents Aroon down indicator.
Below is the simplest possible interpretation of Aroon up and down indicators:
1. When the price trend changes from a bearish to bullish, Aroon up indicator will cross above Aroon down
indicator. Vice-versa for trend change from bullish to bearish.

2. When the market is trending strongly the Aroon indicator will display extreme readings (close to 100)

3. When the market is moving sideways, the Aroon Up and Aroon Down lines will stay parallel to each other.

4. Movements above 70 indicate a strong trend, while movements below 30 indicate low trend strength.
Movements between 30 and 70 indicate indecision. For example, if the bullish indicator remains above 70 while
the bearish indicator remains below 30, the trend is definitively bullish

Use Aroon Indicator in both Trending and Ranging Markets

The best thing about Aroon Indicator is that it can be used both in Trending and Ranging Markets. Crossovers of up
and down indicators as well as extreme readings indicate strong trend, while if the up and down indicators remain
parallel to each other it indicates ranging market.
If you are a trend trader, you can wait for the crossover to initiate a trade.
And if you are a range trader, you can identify a probable range through parallel lines, and then can Buy at low and
Sell at High.
How to filter false signal from an Aroon indicator?
Similar to others, Aroon indicator may also give false signals sometimes. Traders must understand the fact that no
indicator is perfect and so is Aroon. The best way to filter the false signals is to utilize EMA (Exponential Moving
Average) indicator. If the stock is trading above X days EMA and there is the buy signal from Aroon indicator, you
can blindly take that trade. Vice-versa for Short signal. The length of EMA can be determined based on Optimization
on historical data.

Conclusion
The best thing regarding Aroon indicator is, it can identify the trend for the investor first and foremost. When coming
to day trading, strategies depend on Aroon indicator are the best one that people can apply to gain quick profits in
a market. Aroon is one among handful of technical indicators, which can niche the people to attain consistent
success in trend trading and also in the trading within the range. It definitely cannot be used alone, but when used in
conjunction with other indicators it can dramatically increase your success ratio.