The Aroon indicator powers trading strategies based on the unique formulation and calculation. This algorithm is primarily used to identify changes in trends, prices, and strength. Using the AroonUp and AroonDown lines, the technical chart visualizes uptrends, downtrends and sideways price movements. Originally developed in 1995 by Tushar Chande, technical traders have used the Aroon indicator for a wide range of implementations. While the signals may produce false or poor entry points, you can combine this formula with other strategies to filter losing signals. In this post, we’ll cover some of the best Aroon trading strategies, algos, and applications.
How The Aroon Indicator Works
Understand how the Aroon indicator works in Python Algo trading. Aroon Indicator helps you to identify if the price is trending or in the trading range. This indicator combines the AroonDown and the AroonUp indicators. You must know how this indicator works to implement it in your trading strategy. When the Aroon-Up crosses above the Aroon-Down, that indicates that the uptrend may start. Vice versa, when the Aroon-Down crosses above the Aroon-Up, the downtrend starts. Moreover, when both the indicators move in parallel with each other, then consolidation occurs. You can calculate the Aroon indicator using the following formula:
Aroon Indicator = Aroon Up−Aroon Down
Aroon-Up = [(Period Specified – Periods Since the Highest High within Period Specified) / Period Specified] x 100
Aroon-Down = [(Period Specified – Periods Since the Lowest Low for Period Specified) / Period Specified] x 100
You can use this indicator to reveal the beginning of a new trend. This will help you to anticipate changes using ranges to trends. Definitely, understand how the Aroon indicator works in intraday Algo trading.
How To Read The Aroon Indicator
Learn to read the Aroon indicator formula for your next trading strategy. On your trading chart, the Aroon indicator is depicted with two trend lines called the AroonUp and AroonDown. The scale on each line is ranged from 0 to 100. Aroon levels at 0, 30, 70 and 100 are key levels to monitor for your entry or exit points. Also, the Aroon’s default period ranges from 14 to 25 based on your panel. You can lower the range for a quick scalp or use higher ranges for swing trading algo.
With the informative insight about the technicals, we can now learn about two major rules to find possible entries:
AroonUp trading rules: In the AroonUp line , use level 0,30,70 and 100 to determine the bullish sentiment of the market. Level 100 stating a strong uptrend, and the trend weakens as the level closes to 0, where you can look for possible reversals.
AroonDown trading rules: As the name suggests, AroonDown line confirms a strong downtrend at level 100. Once the value drops and fluctuates around level 30, you can then look for possible reversals or trade exits.To identify a consolidating market, avoid entering trades at around level 50.
Avoid confusion by using a single line to find a possible entry in your preferred direction. For highly accurate trades, enter at the intersection of AroonUp and AroonDown line. Definitely, increase your confidence through Aroon readings to predict trend direction on your next trading strategy.
Best Aroon Up Down Settings
The best Aroon setting for trading depend on the trend measurements. The up line and down line are based on the number of periods since the last high or low. By default, the indicator is set to 25 periods. However, you can set the Aroon Up Down to 14 periods or less. For example, if you are trading on a day chart, a lenght of 14 represents the number of days. The length setting allows you to adjust for the look back duration of the Aroon algo. Additionally, you may consider increasing the length when using smaller time frames such as:
- 5 minute timeframe
- 10 minute timeframe
- 1 hour timeframe
- 4 hour timeframe
- 1 day timeframe
Depending on the strategy, you can adjust the chart inputs for 14 periods, 25 periods, or longer term periods too. Certainly, lower time frame intervals are attractive to scalper traders. Meanwhile, swing traders and investors may use Aroon for longer term trend analysis.
Use Aroon Indicator In Emerging Trend
Next, utilize the Aroon indicator in new emerging trend signals for a better algo-trading strategy. First, identify when the Aroon indicator is above the centerline (50) usually called Aroon-Up and Aroon-Down when it is below 50. An emerging trend signal has three stages. When the Aroon-Up moves above Aroon-Down, it is considered an uptrend signal. The second stage is when Aroon-Up moves above the centerline and the Aroon-Down decreases below 50. In the last stage, the Aroon-Up reaches 100, and the Aroon-Down stays in the low levels. Indeed, the Arron indicator allows you to identify the upcoming emerging trends for a secure automated trading application.
Aroon Strategy To Measure Trend Strength
Measure trend strength using the Aroon indicator trading strategy. Aroon Indicator is a powerful tool to analyze trend changes and the strength of trends. You can use the Aroon Indicator formula to know the strength of trends by calculating the number of periods since the price last reached its highs and lows. The High Aroon-Up values show strong upward momentum, whereas the Aroon-Down values show downward momentum. You can Integrate the Aroon Indicator into your trading strategy to enhance decision-making. Moreover, you can combine this indicator with moving averages and volume for better strategy implementation. You can use this two trend strength strategy using the Aroon Indicator –
1. Check the Aroon-Up and Aroon-Down values. The values which are above 70 indicate strong trends.
2. High values signify the presence of uptrends or downtrends accordingly.
Aroon Indicator is a great tool to determine the strength of the current market trend and potential reversals in an asset. Definitely, measure trend strength using the Aroon indicator trading strategy.
Aroon Indicator For Reversals
Use the Aroon indicator to anticipate a trend reversal in your algorithmic trading strategy. When a crossover occurs between the Aroon-Up and the Aroon-Down lines, you can expect a reversal in the trend causing an uptrend in the asset price. The crossover indicates you the prices are likely to drop in the upcoming days. Leverage the Aroon indicator to predict whether the price of an asset is trending; it’s in a trending range; a new trend is beginning, or the overall strength of a trend. For a better results in your trading strategy, use the Aroon indicator combined with other tools like the MACD to avoid potential losses. Surely, leverage your automated trading strategy with the Aroon indicator predicting possible trend reversals.
Aroon Example vs Directional Movement Index (DMI)
Compared to the DMI indicator developed in 1978, the Aroon formulas are weighted and focused towards time rather than price. While the DMI measures the price difference between prior high and lows, the Aroon calculation factors the time between highs and lows. While both indicators use an up line and down lines, the way the formulas work can impact your overall strategy. When interpreting these indicators, consider if time or price is more important for the strategy. Additionally, you may consider combining both indicators for a better measurement of trend changes or continuations.
Aroon vs MACD Technicals
Compared to the MACD indicator, the Aroon algorithm provides insight to the trend strength. Since the Moving Average Convergence Divergence (MACD) line is based on changes in time, direction, and momentum, it’s very popular among traders. However, the Aroon algorithm is not based on moving averages. The up and down lines are based on the trend and length of time (usually set to 25 periods by default). Both indicators are used by technical traders in combination with other strategies and analysis tools. Depending on the trader, you can choose between trend and momentum with Aroon vs MACD.