Skip to main content

Strength and Weakness of the Aroon Indicator

The Olymp Trade boasts a great reputation for convenience, efficiency and innovation. Moreover, the platform offers the Aroon indicator in the list of standard tools. Beginners and experienced traders use it to identify trend changes in the price of an asset, as well as the strength of that trend.

The Aroon indicator consists of the “Aroon up” to measure the strength of the uptrend, and the “Aroon down” to measures the strength of the downtrend. In essence, the indicator measures the time between highs and the time between lows over some time.

Tushar Chande developed the Aroon indicator in 1995 by creatively combining the Stochastic and RSI indicators. By the way, in Sanskrit Aroon means “Dawn’s Early Light”. It is a good name for the indicator to identify incoming trends before they happen.

No wonder, Aroon won a special place among the popular trading indicators and become so widespread among binary market investors. Many trading strategies are based on this simple and practical indicator.

How to set the Aroon Indicator?

As mentioned above, you can find Aroon among the standard tools in the Olymp Trade terminal. It consists of lines and levels and you can find it under the price chart.

The blue line is Aroon Up and the orange line is Aroon down. They move in the range between levels 0, 30, 50, 70 and 100. As a trader, you will have to set the period for the indicator depending on your strategy.

Most traders use it for long-term trading (usually on a daily chart) and set the period to 14 days. However, it can be used with longer timeframes such as 25. If you want to change the settings for Aroon, click on the pencil image.

How to use the Aroon indicator in trading?

The Aroon indicator formulas are primarily focused on the amount of time between highs and lows. The Aroon Up and the Aroon Down lines fluctuate between zero and 100, with values close to 100 indicating a strong trend and values near zero indicating a weak trend. The lower the Aroon Up, the weaker the uptrend and the stronger the downtrend, and vice versa.

The indicator is typically applied to 25 periods of data, but you can use your own settings. Basic rules are that when the Aroon Up is above the Aroon Down, it indicates a bullish trend: the opposite situation indicates a bearish trend.

Basically, the interpretations of Aroon indicator are the following:

  1. When the Aroon Up is between 50 and 70 – a potential uptrend.

 When the Aroon Up is between 70 and 100 – uptrend.

When the Aroon Up is between 50 and 30 – slowing down.

When the Aroon Up is between 30 and 0 –no uptrend.

  1. If the Aroon Down is between 50 and 70 – a potential downtrend.

If the Aroon Down is between 70 and 100 – downtrend.

If the Aroon Down is between 50 and 30 – slowing downtrend.

If the Aroon Down is between 30 and 0 –  no downtrend.

Experts recommend the following steps:

  • CALL when the Aroon Up is between 70-100 or crosses the 70 moving up.

  • PUT when the Aroon Down is between 70-100 or crosses the 70 moving up.

You should know that the crossovers can signal entry or exit points. Up crossing above Down can be a signal to buy. Down crossing below Up may be a signal to sell. However, a crossover may look good on the indicator, but that doesn’t mean the price will necessarily make a big move.

When both indicators are below 50 it can signal that the price is consolidating. New highs or lows are not being created. Traders can watch for breakouts as well as the next Aroon crossover to signal which direction price is going.

The Aroon indicator may at times signal a good entry or exit, but other times it will provide poor or false signals. The signal may occur too late after a substantial price move has already occurred. This happens because the indicator is looking backwards, and isn’t predictive.

Traders still need to use price analysis and other indicators, to make informed trading decisions.

Leave a Reply

Your email address will not be published. Required fields are marked *