Learn how to use the Aroon Indicator trading strategy to detect trend reversals with deadly accuracy. Every trader needs to know how to assess the strength of certain trends and assets. The Aroon oscillator is a two-in-one technical indicator that will help you correctly identify reversals and strengths and weaknesses. This guide is about how to spot trend changes with this powerful tool.
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Market trends are constantly changing. Don’t be fooled into following trends that will change gears. The problem is that most traders have trouble identifying when the trend is changing. 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 one to trade with the last third step, whether it is the end of a bull market or the end of a bear market.”
For more famous trading quotes that can give you insight into the mindset of the most successful traders and hedge fund managers check out: 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 clue?
The best indicator for identifying trend changes and trend strength is the Aroon oscillator.
Next, you will define the Aroon MT4 indicator and reveal the secret Aroon oscillator formula
What is the Aroon Indicator?
The Aroon Oscillator is a technical indicator that is part of the Oscillator indicator. Aroon was developed by Tushar Chande in 1995, and it can help you identify incoming trends and their strengths or weaknesses. Chande was born in India, and in the Sanskrit dialect, Aroon means “Light of the Early Dawn.”
As the name suggests (early light) this oscillator is designed to reveal the early start of a new trend.
Check out Aroon’s chart below:
Common momentum indicators only focus on detecting the relative strength of trends. For example, the ADX indicator can be used to determine only strong directional moves.
Check out how to gauge trend strength with the Best ADX Strategies Built by Professional Traders.
In essence, the Aroon technical indicator combines the benefits of two other oscillators:
- On the one hand, we can see when new trends will emerge. To identify market reversals, you can use the Mass Index indicator (Check Mass Index – The Ultimate Guide to Trend Reversals).
- But, on the other hand, we can see the strength of the trend without using other technical indicators. If you want to develop your trading skills by correctly reading the strength of the market, check out the Sure Level Know Indicator Strategy.
We can see the Aroon technical indicator as a combination of the Mass Index and the KST Indicator.
Too many technical indicators can cause analysis paralysis.
Therefore, being able to use only one clue and extract from multiple pieces of information is a huge advantage.
Second, traditional oscillators use sine waves to give us a visual representation of the indicator. However, Aroon’s line is more triangular. For technical traders, who are more visually oriented, this can provide an advantage in and of itself as trading signals are a million times easier to see.
The trick to determining the direction of the trend and its strength depends 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 a strong bullish trend is likely to see new highs, and a strong bearish trend is likely to see new lows. Basically, Aroon will give you the main picture as we form these new highs and new lows.
The Aroon indicator consists of two lines that oscillate between 0 and 100:
- Aroon-Up, which measures the strength of the updraft.
- Aroon-Down, which measures the strength of a downtrend.
The Aroon-up line uses the highest price in its calculation, while the Aroon-down line uses the lowest price in its calculation. The two lines are then plotted side by side for a better visual representation.
The default parameter setting for Aroon is 14 periods.
But, what are the best settings for the Aroon indicator?
Chande recommends using the best settings for the Aroon indicator as 25 data periods:
- Aroon-up shows how many periods have passed since the last 25 years.
- Aroon-down shows how many periods it has been since the last 25 period low.
Note * For long-term trading strategies we want to look deep into past prices (> 25-period). But for short-term trading strategies, we want to look at recent price data (<25-period).
Aroon indicator settings:
Unlike other momentum oscillators, which are based on price and time changes, the Aroon indicator is quite unique. We also combine the 25 highs and lows in the Aroon oscillator formula:
The math formula above shows you how to calculate Aroon’s lead line.
The Aroon up and down indicator requires tracking the high and low prices of the last 25 periods.
Fortunately, we don’t have to remember the math behind Aroon’s calculations. Our trading platform will do that for us.
Let’s see how to use the Aroon indicator to make money trades.
Here’s how to get started with the Aroon technical indicator:
How to Use the Aroon Oscillator
For example, traders can use the Aroon technical indicator to:
- Identifying new trends (uptrends downtrends or downtrends).
- Assess the strength of the trend.
- Identify multiple and unifying zones.
- And, expect a market reversal.
Above are just a few examples of how to use the Aroon indicator.
For entries, we’ll use next to the upper limit (100) and the lower (0) in the middle (50) as well.
Therefore, here is the basic interpretation of Aroon’s reading:
- A reading close to the 100 level indicates a strong up/down trend.
- A reading close to the 0 level indicates a weak / bearish price trend.
When the Aroon line rises to the 100 level, and the lower Aroon line is close to the 0 level, then the market is in a strong uptrend.
Conversely, when the bottom line of Aroon is close to the 100 level, and the Aroon line is close to the 0 level, then the market is in a strong downtrend.
Aroon’s up and down lines will decline as time passes between new highs or new lows.
When to enter a trade based on a high formation versus a new low formation?
Buy and sell signals for Aroon are simple.
The main Aroon buy signal will occur when the Aroon-Up moves up. When the Aroon-up is increasing towards the 100 level, the chart will also show the price taking place in an upward direction. The rationale behind this is that our chart is now forming this higher high. We’ve got more candles going up in price, which is where the Aroon line is laid out. Also, be sure to read the Best Candlestick Strategy PDF Guide.
Above only Aroon-Up moves up, Aroon-Down needs to move down to confirm the uptrend. Once the Aroon-up crosses above the Aroon-down a buy signal is generated.
The interpretation of this signal is that we are getting higher recently and much further lower. All-in-all this is a clear indication of a bullish market.
Note ** Aroon sell signal will be very opposite. An Aroon sell signal is triggered when the Aroon-Down crosses below the Aroon-Up.
Next, we will explore 3 powerful Aroon trading strategies to navigate any asset type and market.
Aroon Oscillator Trading Strategy
Aroon is a versatile trading indicator that has many trading features. You can use it as your own trading system. Here are three top trading strategies based on the Aroon indicator, which you can use to get more profit:
- Aroon’s rainbow trading strategy (will help you see consolidation and tracking).
- Aroon’s trend strength strategy (will help you ride the trend).
- Aroon’s retracement trading strategy (will help you trade again).
#1 Aroon Breakout Trading Strategy
How to view mergers and acquisitions trade with Aroon?
When the Aroon Up and Aroon Down lines are parallel to each other it is a signal that the price is consolidating. Aroon’s interpretation is that no new or lower levels are made during the default period.
You have two options for consolidation trading.
Wait for the breakout to occur and take a trade in the direction of the breakout.
Or, wait for an Aroon crossover followed by a central cross to add more confluence to the direction of the trade.
Often this Aroon signal will occur before the actual breakout.
Check out Aroon’s chart below:
So, you basically expect the escape.
This is like a front handling all market participants.
You can enter the trade before anyone else.
Let’s see how to ride a strong train with Aroon. Also, learn how to trade using the RSI Oscillator.
#2 Trend Aroon Strength Strategy
The strength of the underlying trend can be revealed through the Aroon line.
After reaching level 100, sometimes we start getting small changes.
The Aroon UP will just hang, like reaching a plateau.
This is the same type of activity that can be found when traditional oscillators reach repurchase readings. And, it remains in overspending time for a very good time.
A picture is worth a thousand words:
A sustained reading of the Aroon-Up near the 100 level is a very strong trend indicator. However, at some point in time one or two trading scenarios can occur:
- To expect a reversal of the trend
- Or, expect a withdrawal
Aroon’s interpretation of this type of reading indicates that we have been forming this high for a very long time. For Aroon-Down, we will form a low level.
Often times this excessive reading on the Aroon oscillator indicates the presence of a strong trend. However, if you are looking for just a scalp in the market, you can exit your trade as soon as Aroon-Up crosses the center line.
But, we are looking to trade with the trend.
And, we’ve developed a proven way to distinguish between a recall and a full reversal.
We call it the law of effort and results.
That effort is the activity measured by the Aroon line (in our case Aroon-Up). And, the result is activity as measured by price action. The theory is that if the Aroon-UP restructures itself by moving away from the 100 reading and going to the 0 reading, the price should follow the lead of the Aroon-Up reading.
We expect that effort to translate into lower prices. If not, and we see only a small change in price, we know the uptrend is very strong.
This is how you can catch pullbacks with Aroon trades and trends.
We combine Aroon’s trend strength strategy and Aroon’s reversal trading strategy into one large market. If you enjoy this method, be sure to check out the proven Best Trading Strategy Articles.
Final Word – Aroon Oscillator
The Aroon indicator is an amazing indicator that can help you see the strength of the trend and ride the trend until the buying or selling climax is reached. We love how versatile the Aroon pointer is up and down. The triangular Aroon oscillator line makes it 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 3 best technical indicators for a profitable trade. Whatever indicator you use, it affects how you interpret the trend. Of course, no single indicator is the Holy Grail of trading.
Aroon is an effective tool for detecting trend changes and trend strength.
If you want to equip yourself with the right knowledge to win the war with the world’s largest financial market check: How to Trade Forex for Beginners Guide.
Thank you for reading!
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