Aroon Indicator Explained: Strategies & How to Trade

What Is the Aroon Indicator?

The Aroon Indicator is a technical analysis tool that helps traders identify market trends. The indicator shows  two lines which monitor the duration since the market reached its highest high and lowest low within a specified time frame.

Definition of the Aroon Indicator

Tushar Chande introduced the Aroon Indicator in 1995 to track the duration since the last major price extremes occurred. The Aroon Up and Aroon Down lines indicate trend strength through their analysis of recent price highs and lows.

Purpose of the Aroon Indicator

The Aroon Indicator helps traders identify both the strength of existing market trends and the optimal moments for trend reversals. The indicator shows recent price highs and lows to help traders understand whether a trend is strengthening or weakening or preparing to reverse.

Understanding the Aroon Indicator Formula

The Aroon Indicator consists of two elements which include Aroon Up and Aroon Down. The indicator tracks the duration since the highest or lowest price occurred within a specified number of days.

• Aroon Up indicates the number of days since the last recorded highest price occurred.

• Aroon Down indicates the number of days since the last recorded lowest price occurred.

Aroon indicator calculation numbers transform into scores that range between 0 and 100. A score of 100 indicates that the highest or lowest price occurred recently.

Typical Lookback Periods

The majority of traders select between 14 and 25 days to evaluate price movements. The standard time frame for daily charts is 14 days. 

The indicator becomes more responsive when using fewer days but its reliability decreases. The indicator becomes slower but more stable when you increase the number of days.

How the Aroon Indicator Works ?

The Aroon Indicator reveals its functionality through the following steps.

Step 1: Look at the Aroon Up and Aroon Down values

A close reading of 100 on the Aroon Up indicator indicates the price reached a new high point. This usually shows a strong upward trend.

A reading of 100 on Aroon Down indicates the price reached a new low which signals a strong downward trend.

Step 2: Notice when the lines move toward the middle

The market shows a sideways movement when both Aroon Up and Aroon Down values reach 50 or lower.

Step 3: Watch for crossovers between the 2 lines

Aroon Up crossing above Aroon Down indicates the start of an uptrend which makes it a suitable time to consider buying.

The start of a downtrend becomes evident when Aroon Down surpasses Aroon Up thus indicating a potential selling opportunity.

Step 4: Understand the Aroon Oscillator

The Aroon Oscillator results from subtracting Aroon Down from Aroon Up.

• The uptrend becomes stronger when the oscillator shows values above zero.

• The downtrend becomes stronger when the oscillator shows values below zero.

A market appears to be in a state of uncertainty or moving sideways when the Aroon oscillator reaches zero. The single line provides immediate insights about market trend strength and direction.

Trading Strategies Using Aroon indicator

This section provides basic methods to apply Aroon independently or together with additional tools.

Trend-Following Strategies

The Aroon Indicator provides excellent trend identification capabilities. A strong uptrend exists when the Aroon Up indicator remains above 70 and the Aroon Down indicator stays below 30.

Traders should maintain their position in the market while this condition remains valid. The market shows a strong downtrend when Aroon Down reaches high levels while Aroon Up remains low.

Aroon crossover Strategy

Monitor the intersection points between the Aroon Up and Down lines.

• Aroon Up crossing above Aroon Down indicates the beginning of an uptrend for traders to initiate buying positions.

• The market enters a downtrend when Aroon Down surpasses Aroon Up. 

Combining Aroon with Other Indicators

Traders enhance their accuracy by using Aroon together with additional technical indicators:

• The Relative Strength Index (RSI) helps verify market overbought or oversold conditions during Aroon trend signals.

• Moving Averages (MA) work together with Aroon to determine the overall market trend while providing precise timing signals.

• The ADX (Average Directional Index) evaluates trend power to validate whether Aroon-identified trends are strong enough for trading purposes.

Advantages and Limitations of the Aroon Indicator

The knowledge of its advantages together with its typical difficulties will enhance your Trading with Aroon performance by reducing errors.

Benefits of Using Time-Based Indicators

The Aroon Indicator stands apart because it tracks time duration since the market reached its highest highs and lowest lows.

The indicator enables traders to detect early trend changes while providing insights into trend strength. Time-based indicators including Aroon deliver more precise signals about trend beginnings and endings than indicators that rely solely on price movements.

Common Pitfalls and False Signals

The Aroon Indicator shares the same imperfections as every other trading tool. The indicator produces incorrect signals when markets experience sideways or choppy conditions because prices move without establishing a defined trend. 

The indicator becomes overly sensitive when using short lookback periods which results in increased noise and deceptive signals. Traders should use Aroon together with multiple tools while practicing good risk management to prevent errors.

Best Aroon settings & Platforms

This Aroon trading system provides you with the most suitable time periods for various trading methods and shows  how to implement Aroon on TradingView and MT5 platforms.

Best Aroon Periods for Different Trading Styles

The 14-period Aroon indicator functions as the most widely used setting which suits many traders who use daily charts.

• Short-term traders who scalp benefit from using periods between 7–10 because these shorter settings enhance indicator sensitivity to fast market changes.

• Long-term traders who invest benefit from using 20–25 period lengths because these longer settings produce smoother signals which minimize market noise while showing major trends.

How to Set Aroon Indicator Up on Trading Platforms

Most trading platforms allow users to customize their indicators through color selection and line thickness adjustments and time frame modifications.

• You can find the Aroon indicator by searching for it in TradingView's Indicators menu and then adding it to your chart. The period length can be modified through the settings options.

• To add the Aroon indicator in MetaTrader 5 (MT5) navigate to “Insert” then “Indicators” and “Custom” before selecting “Aroon.” You can modify the period value through the input tab.

Aroon Indicator Practical Examples

The Aroon Indicator generates bullish and bearish signals through these basic examples. The real-life examples will help you identify when to buy or sell through the Aroon indicator.

Example 1: Bullish Signal

A recent price high indicates a strong upward trend because the Aroon Up line exceeds 70 while the Aroon Down line remains below 30.

The signal indicates that buyers now control the market so prices will probably increase after the price maintained a sideways or slow movement previously. Traders enter buy trades when they see this signal because it indicates an uptrend will continue.

Example 2: Bearish Signal

The price recently reached a new low when the Aroon Down line surpasses 70 while the Aroon Up line drops below 30.

The signal indicates that sellers have taken control of the market so prices might decrease after prices experienced a rising trend. The indicator serves as a warning for traders to sell their positions or establish short trades to benefit from declining market values.

Example 3: Example with chart interpretation using Aroon Indicator

These signals work best in markets with clear Aroon trend indicator. The Aroon indicator produces false or noisy signals in sideways or choppy markets so it is important to confirm with other analysis tools.

• Aroon Up above 70 and Aroon Down below 30: Strong bullish trend.

• Aroon Down above 70 and Aroon Up below 30: Strong bearish trend.

• Both lines near 50: Market is consolidating or ranging.

Aroon Indicator Crossovers:

• Aroon Up crossing above Aroon Down indicates the beginning of an upward market trend.

• Aroon Down crossing above Aroon Up indicates the start of a downward market trend.

Advanced Tips & Best Practices of the Aroon Indicator

The Aroon Indicator requires additional knowledge beyond its fundamental principles to achieve maximum effectiveness. The following section provides essential advice about using multiple timeframes together with other tools for confirmation and pre-trading strategy testing.

Multi-Timeframe Analysis

The Aroon Indicator should be analyzed across different time periods (daily and weekly Aroon chart pattern) to gain better understanding of market trends.

A strong trend signal emerges when both timeframes shows matching trend directions. The combination of multiple timeframes helps you prevent false signals which leads to better trading decisions.

Confirmation Tools and Filters

The Aroon indicator should be confirmed by RSI and Moving Averages and ADX indicators before making trading decisions. The confirmation tools assist traders in eliminating false signals which improves their trading confidence before entering trades.

Backtesting Aroon Strategies

You should perform backtesting on past data before applying any Aroon indicator strategy  with real money. 

The strategy evaluation process reveals its historical performance and allows you to enhance its effectiveness. Trading platforms provide straightforward tools which allow users to test their trading concepts.

Conclusion

Use the Aroon Indicator to spot early trend changes and confirm the trend’s strength. It’s ideal for traders who want to time their entries and exits more effectively. Always consider your trading style and combine Aroon with other indicators for better accuracy.