Step-by-Step Guide to Implementing Aroon Indicator

The Aroon indicator was developed by Tushar Chande in 1995 and is used in análisis técnico to identify the direction of a trend, its strength and potential reversals. It consists of the Aroon Up y Aroon Down lines, which measure the number of periods since the most recent elevada y mínima, respectively.

The word “Aroon” comes from Sanskrit and means “Dawn’s Early Light.” Chande chose this name because the indicators’ main role is to reveal the beginning of a new trend. The arcoon indicators measure the number of periods since price recorded an x-day high or low.

Who is Tushar Chande?

Tushar Chande is an author, trader, and former money manager who has created many popular indicators such as Aroon, stochRSI, VIDYA, CMO, DMI, y Qstick. As a leading technical analyst, Chande has over 25 years of experience and has written multiple books.

Calculation of Aroon indicator:

The Aroon indicators are presented in percentage terms and move between 0 and 100. Aroon Up is based on price highs, while Aroon-Down is based on price lows. They are shown side-by-side for easy comparison.

The arc-up and arc-down lines are calculated using the following formulas:

Aroon Up= (n – Periods since the highest high) / n x 100

Aroon Down= (n – Periods since the lowest low) / n x 100

where n is the number of periods, typically 14 or 25.

Using Aroon indicator for trading

Traders tend to use the arcoon indicator in various ways to make informed trading decisions.

Below, we mention a few common strategies that are used:

1. Trend identification

The relative positions of the Aroon Up and Aroon Down lines show the current trend:

• Uptrend (Tendencia alcista): Aroon Up is above Aroon Down
• Downtrend: Aroon Down is above Aroon Up
• Sideways trend: Both Aroon lines are close together.

2. Trend strength

The values of the Aroon lines help clarify the strength of the trend.

• Strong uptrend: Aroon up is close to 100, and Aroon Down is close to 0.
• Strong downtrend: Aroon Down is close to 100, and Aroon Up is close to 0.
• Weak trend: Both Aroon lines are significantly below 100.

3. Reversal signals

The arcoon indicator can generate reversal signals when the arcoon lines cross.

• Bullish reversal: Aroon Up crosses above Aroon Down.
• Bearish reversal: Aroon Down crosses above Aroon Up.

4. Aroon oscillator

The arcoon oscillator, which comes from the arcoon indicator, is calculated by subtracting the arcoon Down from the arcoon Up.

Aroon oscillator = Aroon Up + Aroon Down

The arc oscillator oscillates between -100 and 100, providing extra information about the strength of the trend and its direction.

• A positive oscillator value indicates an uptrend.
• Negative oscillator value: Indicates a downtrend.
• Oscillator value near 0: Suggests a range-bound market.
• Extreme oscillator values: May signal potential reversals.

Combining the Aroon indicator with other indicators

The arcoon indicator can be used alongside other technical indicators to improve the accuracy of signals.

Moving Averages (MAs):

Traders can use MAs to confirm the direction of the trend which is signalled by the arcoon indicator.

Relative Strength Index (RSI):

The RSI can give information regarding overbought and oversold conditions in conjunction with the Aroon indicator.

Advantages and disadvantages of using the Aroon indicator

Traders tend to prefer using the Aroon indicator as it is simple to understand and visually interesting. It can identify trend direction, strength and potential reversals, helping traders access useful information.

On the other hand, it could lead to losses as it can generate false signals, while it’s not as effective in different markets and timeframes and requires adjustment of traders’ settings and strategies.

• Sencilla
• Visually engaging
• Can identify trend direction
• Can identify trend strength
• Can identify potential reversals

• Can generate false signals in choppy markets
• Its effectiveness is different across different markets y timeframes
• Requires traders to adjust settings y estrategias for different markets y timeframes

Aroon Indicator vs Directional Movement Index (DMI)

The arc indicator and the Directional Movement Index (DMI), by Welles Wilder, employ up-and-down lines to determine the direction of a trend.

However, an important distinction can be made regarding their purpose. The former measures the time between highs and lows, whereas the latter takes into consideration the price difference between current and previous highs or lows. This is because while the Aroon indicator focuses on time, the DMI focuses on price.

Why use an indicator?

Often used in análisis técnico, an indicator enables a trader to examine the current market, its tendencies, activity level, and possible shifts. These are used for understanding prior trends in prices and speculating on future trends by calculating mathematical figures based on price and volume data.

For instance, trend indicators such as the moving average help traders determine the direction as well as the strength of the existing trend, while momentum indicators like the Índice de fuerza relativa illustrate the speed and reversals of existing prices. Another one, Bandas de Bollinger, reveals to traders the level of price fluctuation, which gives an idea of the stability of a market or its turbulence.

Through these indicators, the trader gets a better picture of the action and can correctly determine the time to enter or exit the market y potentially make the biggest profits while avoiding equally big losses. Indicators assist in confirming trading signals and help eliminate the chances of getting fake signals.

They also assist the trader to building and enhancing their trading strategies, since they offer a more mechanical and consistent way to establish patterns and analyse the market. The use of indicators helps increase the reliability and efficiency of technical analysis, making trading in the mercados financieros less puzzling for traders.

La formación en IronFX

Technical analysis can be confusing, and when it comes to choosing the right indicator, it is even more so. For new traders who may find market analysis complex or demanding, IronFX offers a bespoke library of free educational materials to assist all traders in enhancing their trading skills and abilities.

This information is useful for traders of all levels of experience and can be found on IronFX’s website and within its Academy. Its resources include webinars, podcasts y articles on análisis fundamental and technical analysis, trading techniques, risk management techniques and the latest trends in the financial markets. The dynamic nature of the financial markets requires traders to be always on the lookout for new trends and updates so they are always ready to act.

For this reason, IronFX ensures that its analysis and trading tips are as current as possible and reflect new changes and trading strategies. A large number of trading enthusiasts, market analysts and traders profesionales make up IronFX’s distinguished team of specialists and their knowledge shines through their expertly crafted insights, which you can access by watching multilingual webinars, listening to IronFX’s podcasts and many more.

If you register for IronFX’s Academy, you can earn a Certificate by completing the various trading courses covering the A to Z of trading! IronFX’s innovative and useful series of webinars and podcasts conducted by experienced traders and analysts will allow traders to discover tried-and-tested strategies and explore the markets with confidence.

Exención de responsabilidad:
Esta información no se considera asesoramiento ni recomendación para invertir, sino que es una comunicación de marketing