Learn how to use the Aroon Indicator trading strategy to detect changes in the trend direction with deadly accuracy. Every trader needs to know how to assess the strength of a given trend and asset. The Aroon oscillator is a two-in-one technical indicator that will help you correctly identify reversals and their strengths and weaknesses. This guide is all about how to spot trend changes with this powerful tool.
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The market trends are constantly changing. Don’t be fooled following a trend that is about to change gears. The issue is that most traders have problems to identify when the trend changes. Market Wizard and billionaire hedge fund manager Paul Tudor Jones has this to say about how to identify trend changes:
“There is no training, classroom or otherwise, that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market.”
For more famous trading quotes that can give you a glimpse into the mindset of the most successful traders and hedge fund managers check: Top Trading Quotes of All Time - Learn to Trade.
If you want to be able to detect big trend changes, you need to be equipped with the right tools.
So, which is the best indicator?
The best indicator to identify a trend change and the strength of the trend is the Aroon oscillator.
Next, you’ll define the Aroon indicator MT4 and reveal the secret Aroon oscillator formula:
What is Aroon Indicator
The Aroon oscillator is a technical indicator that is part of the oscillator family of indicators. Aroon was developed by Tushar Chande in 1995, and it can help you identify incoming trends and their strength or weakness. Chande was born in India, and in the Sanskrit dialect Aroon means “Dawn's Early Light.”
As the name suggests (early light) this oscillator was designed to reveal the early beginning of a new trend.
Check Aroon chart below:
Typical momentum indicators focus only to detect the relative strength of a trend. For example, the ADX indicator can be used to determine only strong directional moves.
Check how to measure the strength of the trend with Best ADX Strategy Built by Professional Traders.
In essence, Aroon technical indicator combines the benefits of two other oscillators:
- On the one hand, we can spot when a new trend will emerge. For identifying market reversals you can use the Mass Index indicator (Check the Mass Index – Ultimate Guide to Trend Reversal).
- But, on the other hand, we can spot the strength of the trend without using other technical indicators. If you’re looking to develop your trading skills to correctly read the market strength, check Know Sure Thing Indicator Strategy.
We can see the technical indicator Aroon as a combination between Mass Index and KST Indicator.
Too many technical indicators can lead to analysis paralysis.
So, being able to only use one indicator and extract from it multiple information is a big advantage.
Secondly, the traditional oscillators use sine waves to give us a visual representation of the indicator’s reading. However, Aroon lines are more triangular. For technical traders, which are more visually oriented, this can provide an edge in and on itself as trade signals are a million times easier to be spotted.
The trick to determine the trend reversal and its strength relies on understanding the Aroon oscillator formula.
So let’s begin.
What is the Aroon Oscillator Formula?
The main idea behind the Aroon technical indicator is that strong bullish trends will likely see new highs, and strong bearish trends will likely see new lows. In essence, Aroon will give you key insights when we’re forming these new highs and new lows.
The Aroon indicator is comprised of two lines that oscillate between 0 and 100:
- Aroon-Up, which measures the strength of the bullish trend.
- Aroon-Down, which measures the strength of the bearish trend.
The Aroon-up line uses the price highs in its calculations, while the Aroon-down line uses the price lows in its calculations. These two lines are then plotted side-by-side for a better visual representation.
The default parameter settings for Aroon is 14 periods.
But, what are the best settings for the Aroon indicator?
Chande recommends applying the best setting for Aroon indicator as being a 25 periods of data:
- Aroon-up is showing how many periods it has been since the last 25-period high.
- Aroon-down is showing how many periods it has been since the last 25-period low.
Note* For long-term trading strategies we want to look far away into the past price (> 25-periods). But for short-term trading strategies, we want to look at the most recent price data (< 25-periods).
Aroon indicator settings:
Unlike other momentum oscillators, which are based on price changes and time, the Aroon indicator is pretty unique. We also incorporate the 25-period highs and lows into the Aroon oscillator formula:
The above mathematical formula shows you how to calculate the Aroon indicator lines.
The Aroon up and down indicator requires tracking the high and low prices over the last 25 periods.
Luckily, we don’t have to remember the math behind the Aroon calculation. Our trading platform will do that for us.
Let’s see how to use the Aroon indicator to make money trading.
Here is how to get started with the Aroon technical indicator:
How to Use Aroon Oscillator
For example, traders can use technical indicator Aroon for:
- Identifying new trends (uptrending or downtrending).
- Assessing the strength of the trends.
- Identifying range zone and consolidations.
- And, anticipate market reversals.
The above are just a few examples of how to use the Aroon indicator.
For entries, we’re going to use beside the upper (100) and lower (0) boundaries the centerline (50) as well.
So here is the basic interpretation of the Aroon readings:
- A reading close to the 100 level indicates a strong bullish/bearish trend.
- A reading close to the 0 level indicates a weak bullish/bearish trend.
When the Aroon up line is close to the 100 level, and the Aroon down line is close to the 0 level, then the market is in a strong bullish trend.
Conversely, when the Aroon down line is close to the 100 level, and the Aroon up line is close to the 0 level, then the market is in a strong bearish trend.
The Aroon up and down lines will decline as the elapsed time between a new high or low increase.
When to enter a trade based on a new high formation versus a new low formation?
The buy and sell signals for the Aroon are straightforward.
The primary Aroon buy signal is going to take place when Aroon-Up is moving upwards. As the Aroon-up is increasing going towards the 100 level, the chart will also show the price going in a bullish direction. The rationale behind this is that our chart is now forming these higher highs. We’re getting more bullish candles, which is what the Aroon line is unveiling. Also, be sure to read the Best Candlestick Strategy PDF Guide.
On top of just the Aroon-Up moving upwards, the Aroon-Down needs to move downwards to confirm the bullish trend. Once Aroon-up crosses above Aroon-down a buy signal is generated.
The interpretation of this signal is that we’re getting more recent higher highs and farther away lower lows. All-in-all this is a clear indication of a bullish trending market.
Note** the Aroon sell signals are going to be pretty much the exact opposite. An Aroon sell signal is triggered when Aroon-Down is crossing below Aroon-Up.
Next, we’re going to explore 3 powerful Aroon trading strategies to navigate any type of asset and market.
Aroon Oscillator Trading Strategy
Aroon is a very versatile trading indicator that has built-in many trade features. You can use it as a trading system on its own. Here are the top three trading strategies based on the Aroon indicator, which you can use to gain more profits:
- Aroon breakout trading strategy (will help you spot consolidations and breakouts).
- Aroon trend strength strategy (will help you ride the trend).
- Aroon pullback trading strategy (will help you trade retracements).
#1 Aroon Breakout Trading Strategy
How to spot consolidation and trade breakouts with Aroon?
When Aroon Up and Aroon Down lines are parallel to each other it’s a signal that the price is consolidating. The Aroon interpretation is that no new highs or lows are made during the default period.
You have two options to trade consolidations.
Wait for the breakout to happen and take the trade in the direction of the breakout.
Or, wait for the Aroon crossover followed by a centerline cross to add more confluence for the direction of the trade.
More often these Aroon signals will happen before the actual breakout.
See Aroon chart below:
So, you basically anticipate the breakout.
This is like front running all market participants.
You get to enter a trade before anyone else.
Let’s now see how to ride strong trends with Aroon. Also, learn how to trade using the RSI Oscillator.
#2 Aroon Trend Strength Strategy
The underlying strength of the trend can be revealed through the Aroon lines.
After we reach the 100 level sometimes we’re starting to get periods of little changes.
The Aroon UP will simply hang, kind of like reaching a plateau.
This is the same kind of activity that can be found when a traditional oscillator reaches overbought readings. And, it stays in overbought reading for a good amount of time.
A picture is worth a thousand words:
The Aroon-Up continuous reading close to the 100 level is an indication of a very strong trend. However, at some point in time one or two trade scenarios can happen:
- To expect a trend reversal
- Or, to expect a pullback
The Aroon interpretation of this type of reading suggests that we’ve been forming these higher highs for a very long period of time. For Aroon-Down we would be forming lower lows.
Often times these excessive readings on the Aroon oscillator signals the presence of a strong trend. However, if you’re looking to just scalp the market, you can exit your trade as soon as the Aroon-Up crosses below the centerline.
But, we’re looking to trade with the trend.
And, we have developed a proven way to differentiate between a pullback and a full reversal.
We call it the law of effort vs. result.
The effort is the activity measured by the Aroon lines (in our case Aroon-Up). And, the result is the activity measured by the price action. The theory is that if the Aroon-UP resets itself by moving away from the 100 readings and going to 0 readings, the price should follow the lead of the Aroon-Up reading.
We would expect the effort put to translate into lower prices. If it does not, and we see only a slight change in the price, we know the uptrend is very strong.
This is how you can catch pullbacks with Aroon and trend trading.
We combined the Aroon trend strength strategy and Aroon pullback trading strategy into one big market edge. If you enjoyed this method, be sure to check out other proven in the Best Trading Strategies Article.
Final Words – Aroon Oscillator
Aroon indicator is an unusual indicator that can help you spot the strength of a trend and ride that trend until a buy or sell climax is reached. We like how versatile the Aroon Up and down indicator is. The triangular Aroon oscillator lines make it so much easier for the untrained eye to spot buy and sell signals.
All-in-all you have a momentum oscillator that can easily be in your top 3 best technical indicators for profitable trading. What indicators you’re using, it affects how you interpret the trends. Of course, no single indicator is the Holy Grail of trading.
Aroon is an effective tool for detecting changes in the trend direction and the strength of the trend.
If you want to equip yourself with the right knowledge to win the war with the world’s biggest financial market check: How to Trade Forex for Beginners Guide.
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