Understanding the Aroon Indicator
The Aroon Indicator, developed by Tushar Chande in the late 1990s, is a technical analysis tool used to determine the strength and direction of a trend for an asset, such as stocks or cryptocurrencies.
It shares similarities with the Average Directional Index (ADX) and is part of many technical pattern-based signals.
“Aroon” originates from Sanskrit, meaning “the earliest light of the dawn.”
Chande chose this name as the indicator aims to identify the beginning of new trends.
Traders use Aroon indicators to detect emerging trends, identify consolidations, define corrective periods, and predict potential reversals in the price of an asset.
The Aroon Indicator consists of two components:
Aroon-Up and Aroon-Down:
- Aroon-down values indicate that highs or lows occurred further back in time.
- Aroon-up values indicate a more robust trend, while lower values indicate a weaker or non-existent trend.
These indicators track the timing of the asset’s most recent highs and lows.
Aroon Indicator is Useful but Limited.
While the Aroon Indicator can provide entry or exit points, it may sometimes offer inaccurate or misleading signals.
The buy or sell signal may come too late after a significant price movement.
Since the indicator relies on historical data and is not predictive, traders should consider using other technical indicators in conjunction with Aroon, such as on-balance volume (OBV), moving average convergence divergence (MACD), relative strength index (RSI), accumulation/distribution indicator, and stochastic oscillator, to enhance their trading decisions.