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The Aroon Indicator 

The name Aroon is derived from the Sanskrit language and means “dawn’s early light.” The Aroon Indicator is a momentum oscillator developed by Tushar Chande in 1995. The Aroon Indicator helps the trader catch any trend change from the very beginning. It strongly emphasizes time in relation to price and is frequently used to identify new trends and anticipate reversals. Also, it shows whether a current price behavior is trending or consolidating.

While the Aroon indicators can be used in any time frame to gauge how long it has been since a price recorded a new high or low, they are most frequently calculated using 25 periods. 

This article will explain the Aroon Indicator, how to use it, and its limitations.

What is The Aroon Indicator 

The Aroon indicator is a two-in-one technical indicator that investors use to identify the strength of a trend and trend reversals in the asset price. The Aroon indicator works by measuring the time between highs and lows over a period of time. Higher Aroon values denote a more recent high or low, whereas lower Aroon values indicate a high or low that occurred in a more distant time. Higher Aroon values signify a stronger trend, whereas lower Aroon values signify a weaker trend or no trend.

Strong uptrends and downtrends are supposed to reach new highs and lows frequently. When this occurs, the indication lets you know when it isn’t. The Aroon indicator consists of the “Aroon up” line, which gauges the strength of uptrends, and the “Aroon down” line, which measures the strength of downtrends.

The Aroon Oscillator

As a component of the Aroon Indicator system, Tushar Chande created the Aroon Oscillator. He designed the system to draw more attention to short-time period trends. The Aroon Oscillator is a trend-following indicator that uses the Aroon Up and Aroon Down components of the Aroon Indicator to determine the strength of a current trend and its propensity to persist.

The oscillator moves between -100 and 100. A high oscillator value signals an uptrend, while a low oscillator value indicates a downtrend. When the oscillator rises above the zero line, the Aroon Up crosses over the Aroon Down, and the price has recently reached a higher high than a lower, signaling an uptrend. The Aroon Down crosses below the Aroon Up as soon as the oscillator moves below zero. Generating a new low that can indicate the start of a downtrend

How to Calculate The Aroon Indicator Values

1. Choose a specific period “n” for the “Aroon Indicator.”

2. Track the highs and lows for the last number of periods on an asset.

3. Note the number of periods since the last high and low.

4. Use the Up and Down Aroon formulas with the numbers calculated in steps 1 and 2.

  • Aroon Up = [(n − number of periods since the highest high)/period specified] x 100 
  • Aroon Down = [(n− number of periods since the lowest low)/period specified] x 100

How to Calculate the Aroon Oscillator

  • Aroon Oscillator = Aroon Up – Aroon Down

How to Interpret The Aroon Indicator

The Aroon Indicator has values between 0 to 100. If the value is near 100, it indicates a strong trend, and if the value is near 0, it indicates a weak trend. If the Aroon Up is lower (near 0 value), the bull trend is weaker, the bear trend is stronger, and vice versa. The idea behind the indicator is that in downtrends, the price should make lower lows, and in uptrends, the price makes higher highs.

Crossovers can help determine entry or exit points. Up crossing above Aroon Down can be taken as a trading signal to buy the asset, while down crossing below Up can be taken as a signal to sell.

New highs or lows are not being created when both indicators are below 50. The price is in a consolidation. Traders can use breakouts and the Aroon crossover to identify the price direction. 

The Aroon indicator can reveal if a price is trending or consolidating. The Aroon indicator may or may not reflect a confirmed movement, just like other indicators. The easiest way to use this indication is for traders to understand how to read it correctly.

Limitations of The Aroon Indicator

The Aroon Indicator has limitations similar to all other indicators. It can provide poor or false signals and confuse the trader. The purchase or sell signal can come too late after the price has moved significantly. This occurs because the indicator is not predictive.

Although a crossover may appear positive on the indicator, this does not guarantee that the price will move significantly. The indicator just considers the number of days since a high or low and ignores the size of price movements. To make wise trading decisions, traders must still employ technical analysis and other indicators like RSI, ADX, moving averages, or MACD.

This indicator’s strength on-trend is its biggest flaw. We classify a trend as strong when the Aroon Up or Down line hits 100, though this is not always the case. The price can fail to reach new highs or lows even though the Aroon Up or Down levels are 100. Any indicator is trustworthy after you comprehend how it works and can forecast price movement by combining it with other indicators.

The Bottom Line

Trading can be quite profitable when using the Aroon indicator. It is unique because it can display the market’s range and trading behavior. Like all technical indicators, combining the Aroon Indicator with other indicators is the best way to understand the market situation. Always remember to have a trading strategy with proper risk management to get the best results. 
Let’s face it, trading any market can often be a difficult and risky endeavor. This is especially true for the crypto market. Day traders, swing traders and long-term investors need all the useful information and tools they can get. Glassnode, the crypto industry’s leading blockchain data and intelligence platform, equips investors and traders with the most comprehensive on-chain insights to help them make better investment and trading decisions.

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