What Is The Aroon Indicator?
The Aroon indicator is a technical indicator used in technical analysis (TA). Its main purpose is to spot changes in price trends over time.
The Aroon chart indicator works by tracking the time elapsed since the most recent high and low price of an asset over a given number of periods — typically 25.
This results in the formation of two lines:
- Aroon UP
- Aroon Down
The Aroon UP line tracks the time since the latest high and Aroon DOWN does the same but for the low price.
Tracking the highs and lows of a price over time effectively means that the indicator is tracking price resistance and support levels, because prices tend to bounce back from these levels before continuing their trajectory.
Aroon indicator indicates a trend or a consolidation phase by understanding the movement of levels. This comprises two lines one which shows positive [sic] trend while other [sic] which shows negative [sic] trend in the market.
West, J. (n.d.)
Calculating The Aroon Indicator: A Quick Guide
To calculate the upper and lower lines of the Aroon indicator we:
- Subtract the time since the latest high and low prices from the total period.
- Divide each result by the total period.
- Multiply by 100.
This gives us a number between 0 and 100, showing the time passed since the last high or low as a percentage of the period.
The Aroon indicator formula comes in two parts — the formula for calculating the Aroon UP and Aroon DOWN lines:
- Aroon UP = (25 – Periods Since 25 period High) / 25 * 100
- Aroon DOWN = (25 – Periods Since 25 period Low) / 25 * 100
How to Interpret the Aroon Indicator
Reading the Aroon indicator helps traders understand price trends thanks to its upper and lower lines (i.e., Aroon UP and Aroon DOWN). These lines move up and down from 0 to 100 as new highs and lows are established on the charts. The closer a line is to 100, the stronger the price trend is considered to be.
If the upper line is close to 100, a new high was made relatively recently over the tracked period. If the lower line is closer to 100, it indicates a new low was reached.Â
When the upper line crosses above the lower line, a new high has been reached—a bullish buy signal. Conversely, when the Aroon DOWN crosses the Aroon UP, a new low is created, signaling a bearish move and potential exit point.
Finally, the Aroon indicator allows for identifying consolidation periods (i.e., periods when neither new highs nor lows are reached). These can be observed when the indicator’s upper and lower lines are below 50.
Aroon Indicator in Action With a Practical Example
To help solidify your understanding of how the Aroon indicator works, let’s use a real example from the BTC/USDT chart:
In the chart above, we can see the point of how the Aroon Indicator’s upper line crosses the lower line (Point 1 in the image). It coincides with the beginning of a strong price trend for Bitcoin from $40,000 to $72,000.
Throughout the duration of the trend, the Aroon UP stays close to 100, meaning that new price highs are reached continuously. After the price peaks the upper line begins to fall until it is overtaken by the lower line. At that point, a downtrend has begun to form.
Final Thoughts
The Aroon indicator is a simple and relatively intuitive technical indicator. Traders can use it to improve their understanding of market trends and dynamics. It is especially useful for automated trading where it can be applied to generate buy and sell signals and help trading bots detect consolidation periods.
West, J. (n.d.). Aroon Indicator. Ensign Software.
https://www.ensignsupport.org/bb/pdfs/Studies-AroonIndicator.pdf
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