Aroon Indicator

🔍 What Is It?

The Aroon indicator is a technical analysis tool developed by Tushar Chande in 1995. It’s designed to identify the beginning of new trends, the strength of current trends, and potential reversals. The name "Aroon" is derived from the Sanskrit word meaning "dawn’s early light" — symbolizing the idea of a new trend emerging.

Aroon is made up of two lines:

• Aroon Up – measures the strength of an uptrend

• Aroon Down – measures the strength of a downtrend

Both lines oscillate between 0 and 100.

⚙️ How It Works

The indicator calculates how many periods have passed since the highest high (Aroon Up) and the lowest low (Aroon Down) over a user-defined period (usually 25).

• Aroon Up = ((Periods - Days Since Highest High) / Periods) × 100

• Aroon Down = ((Periods - Days Since Lowest Low) / Periods) × 100

If the Aroon Up is near 100, it means a recent high occurred — signaling a strong uptrend. If Aroon Down is near 100, it means a recent low occurred — indicating a strong downtrend.

📖 How to Read It

• Aroon Up above 70 and Aroon Down below 30: strong uptrend

• Aroon Down above 70 and Aroon Up below 30: strong downtrend

• Both below 50: weak or sideways trend

• Crossovers: potential trend changes

Example: If Aroon Up crosses above Aroon Down, this could signal a bullish reversal. Conversely, if Aroon Down crosses above Aroon Up, a bearish shift might be happening.

🛠 Best Settings

The default setting is 25 periods, which works well for medium-term traders. You can adjust this depending on your trading style:

• Short-term traders may use 14 periods

• Long-term investors may prefer 50 periods

Test different settings in backtesting to see what fits your market and strategy best.

💡 How to Use It in a Strategy

1. Trend Confirmation: Use Aroon to confirm if the current move is strong or fading.

2. Trend Reversal Signals: Look for crossovers between the Aroon Up and Aroon Down lines.

3. Avoiding Ranges: Aroon helps filter out false signals during sideways markets.

4. Combine with Other Tools: For better accuracy, use it alongside indicators like RSI or MACD.

Example Strategy:

• Go long when Aroon Up crosses above 70 and Aroon Down drops below 30.

• Go short when Aroon Down crosses above 70 and Aroon Up falls below 30.

🚫 Common Mistakes

• Over-reliance on crossovers: Not every crossover is a valid signal. Always confirm with volume or other indicators.

• Ignoring market context: Aroon is less effective during highly volatile or range-bound markets.

• Fixed settings: Different assets and timeframes need customized settings. Avoid using default blindly.

🧠 Final Thoughts

The Aroon indicator is a powerful tool for spotting trend strength and potential reversals. While simple to use, it becomes even more effective when combined with market context and other indicators. Always backtest and understand your tools before using them in live trades. A smart trader uses Aroon not just to follow trends — but to stay one step ahead of them.