Aroon Indicator was developed in 1995 by Tushar Chande, the head of Tuscarora Capital Management. The indicator is used for identifying the strength and direction of a trend. This technical instrument reports the uptrend, downtrend and the likelihood that it will reverse or continue.
Formula
Aroon Up = ((Number of periods - number of periods since highest price) / number of periods) * 100
Aroon Down = ((Number of periods - number of periods since lowest price) / number of periods) * 100
Trading use
The classical methods of usage of Aroon indicator applied in stock and commodity markets cannot be used in today’s currency market.
That is why in order not to get trapped on the wrong side of the market it is necessary to choose more accurate signals generated by the indicator.
The main signal of Aroon Indicator is given when the Aroon up (depicted as a blue line) and Aroon down (depicted as a red line) cross each other.
When Aroon Up crosses Aroon Down bottom-up, it indicates the likelihood of emerging a medium-term uptrend. When Aroon Up crosses Aroon Down from above you should prepare with exit orders on the base of this signal.
An alternate scenario includes Aroon Up crossing Aroon Down from above, indicating that the downtrend may occur and, therefore, it is better to sell. Closing orders may be done when there is reversal crossing of signal lines.
When the signal occurs above 40 percent and below - 40 percent, which can be called extreme zones (not the zones of oversold/overbought condition), it increases the value of the signal and can result in further price strengthening.
One more powerful trading signal is divergence between the price action and Aroon Up.
If Aroon Up edges up when the price curve is falling, it will mean that the price is likely to reverse from downward to upward (divergence signal).
If Aroon Up edges down when the price is in an uptrend, the price will be expected to go lower.
InstaForex Aroon Parameters
Aroon_Period = 9
