The Aroon indicator is a trend indicator similar to J Welles Wilder’s Directional Movement Index (DMI). This Aroon indicator was developed by Tushar Chande and was first published in the September 1995 issue of Technical Analysis of Stocks & Commodities. The name is derived from the Sanskrit word “aroon”, which translates to “the beginning of the dawn light”, and describes the Aroon indicator appropriately because the indicator it tries to identify new trends early in its forming stage. The Aroon indicator illustrates two lines that indicate the strength of a trend:
Aroon Up, which measures the number of bars since the pair made a new high for the period, and
Aroon Down, which measures the number of bars since the pair made new lows for the period.
Both Aroon Up and Aroon Down are either 0 and 100. If Aroon Up or Aroon Down line is close to 100, this indicates a strong up or down trend, depending on which line approaches 100. And when the two lines are close to zero, this indicates a tendency weak up or down sentiment, again, depending on which line is close to zero.
The Aroon indicator consists of two lines; The calculation consists of two separate parts that follow similar steps. Aroon Up is calculated in relation to the amount of time in the period backwards since the last price scored high. While Aroon Down is calculated in relation to the amount of time in the period backwards since the last price scored low. Both calculations are converted into percentages by multiplying the result by 100.
Aroon Up = ((n – Period Since n High Period) / n) x 100
Aroon Down = ((n – Period Since n Low Period) / n) x 100
In both formulas, n is the number of back periods for the indicator.
The Aroon indicator can be used in one of two ways: using signal level to extreme readings and using crossed signals.
If either Aroon Up or Aroon Down line is above the 70 line, this indicates that there is a tendency to strengthen towards the line above 70. Conversely, if either Aroon Up or Aroon Down line is below the 30 line, this indicates that there is a tendency of weakening towards the line below 30. Also, when either Aroon Up or Aroon Down line cross below the 50 line, this indicates that the trend in the direction of the line being crossed is losing its momentum.
When the Aroon Up line crosses above the Aroon Down line, this indicates a possible uptrend, especially if it occurs between the 30 and 70 lines. Conversely, when the Aroon Down line crosses below the Aroon Up line, this indicates a possible downtrend.