Indicator Toolbox – Aroon

By Jody Samuels

The last ten articles have been entitled Analysis Toolbox and we discussed the various market cycles including trends and continuations. This next part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. (for a free 2-week trial CLICK HERE)

In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to take action and begin your journey by completing the Trader’s Scorecard (www.fxtradersedge.com/scorecard) and to get down to business by arranging a free coaching session. In this Indicator Series, we talk about the mechanics of trading.

Aroon

Aroon may be used to determine if an instrument is trending or not and how strong the trend is. The indicator system consists of two lines Aroon(up) and Aroon(down). Developed by Tushar Chande in 1995.

SETTINGS

The Aroon indicators account for the # of periods (e.g. daily, 4H, 1H, 1M) since price recorded an x-period high or low. The indicators include Aroon-Up and Aroon-Down. The standard setting is 25 periods which measures the number of periods since a 25-period high in the case of a 25-period Aroon-Up. A 25-period Aroon-Down measures the number of periods since a 25-period low. Since Aroon focuses on time relative to price, it differs from standard momentum oscillators, which look at price vis-à-vis time.

These indicators fluctuate between 1 to 100 percent. Aroon-Up is calculated on price highs, and Aroon-Down on price lows.

Aroon-Up = ((25 – Periods since 25-period High)/25) x 100

Aroon-Down = ((25 – Periods since 25-period Low)/25) x 100

USING THE TOOL

Traders use the Aroon indicators to recognize trends, corrections and reversals. The indicator tells you whether the market is trending and how strong the trend is. ‘Aroon’ means Dawn’s Early Light in Sanskrit. Chande selected this name as the Aroon indicators are meant to find the start of the new trend.

The red or black Aroon declines when no new lows or highs are being made as measured by time. A reading above 50 means a new high or low was made in the last 12 periods of the lookback period which is 25 periods in our example. A reading below 50 means that a new high or low was made in the first 13 periods of the 25-period lookback period. There is an inverse relationship between the # of days since the last High-Low and the Aroon Up-Down indicator value as shown in the following table.

# of Days Since the last High or Low Aroon Up or Down Percent
0 100
1 96
6 76
12 52
13 48
20 20
25 0

 

A strong uptrend will keep the Aroon indicator close to 100 and a strong downtrend will as well. A correction in an uptrend or a downtrend will bring the Aroon down to the 50% mark. If there is a strong uptrend in play, the Aroon-Up will hold between 50-100% and the Aroon-Down will hold between 0-50%.

EXAMPLE

In the USD/CAD 4-Hour chart example below, one sees a clean upward swing move followed by a downward swing move. For the uptrend move, the Aroon-Up stays between 70-100% for the most part. As USD/CAD retraces this uptrend, so too does the Aroon-Up indicator. For the downtrend move, the Aroon-Down stays between 70-100% as well. Notice when the red crosses above the black, signaling a change in trend from up to down, and when the black crosses above the red, signaling a change in trend from down to up. I must say I find this indicator intriguing and would like to spend more time testing this.

See you next week for another “A” indicator!

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If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.

I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.

The Trader’s Pendulum: The 10 Habits of Highly Successful Traders.  Copyright (c) 2015 by Jody Samuels.  This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.

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