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AROON Indicator
AROON Type: Oscillator (trend detection)
The AROON Indicator was developed by Tushar Chande in 1995. The indicator was used originally to find out whether a share / index is in a sideward trend or how strong the actual trend is. 'AROON' means from the Sanskrit translated: ?the first light of the dawn?. This name was chosen by Chande, because the AROON was sketched to reveal the beginning of a new trend.
The AROON consists of two indicator lines: the AROON-UP (green) and AROON-DOWN (red). Besides there is still the AROON-Oscillator, a single Indicator-Line which is defined as a difference between AROON-UP and AROON-DOWN. Because AROON-UP and AROON-DOWN oscillate between 0 and +100, the AROON-Oscillator runs from -100 to +100 with the zero line as a signal line.
The AROON serves other than the DM+ and DM- Indicator (see DMI) to identfy whether a stock is in a trend and how strongly (time wise!) a trend is formed. By both components AROON-UP and AROON-DOWN the indicator is very slightly 'readable' and runs, besides, in very regular roads without big interrupting movements. Calculation:
The AROON-UP is calculated, while one ascertains during a given period how much time (on a percentage basis) passed between the beginning of the period and the point in which the highest closing price appeared during this period. If the share reaches new period highest levels, is the AROON-UP with 100. Vice versa is valid that the AROON-DOWN lies with 100 if the share reaches a new period low level.
| Interpretation: Chande gives that values with more than 75 indicate a strong trend in the indicated direction. If the AROON-UP goes down under 75, this registers that the actual upward trend has lost the upward-momentum. The similar is valid vice versa for an AROON-DOWN which goes down under 75: her momentum loses the actual downward trend. If the AROON-UP and AROON-DOWN lie at the same time below the signal line with 75 this point to a mostly short-term sideward trend.
AROON is also well suited because of his ability to deliver trend-compliant 'reentry '-signals. It is often that the signal-giving component of the AROON breaks briefly under the signal line and penetrate short time later again in the signal area. These 'reentry ' signals can be used either for new engagements, or to request to the hold of the engagement. Because these 'reentry ' signals seem rather often, therefore, one should not use the break of the line yet for the sales of own position, as long as no cross with the trend occurs against directed component.
AROON and tradingsystems: the AROON isolates is considered for tradingsystems unsuitably. He contains no trend strength components (in terms of volatility) and the signals from the cross come relatively late and might eat up a large part of the accumulated profit again. Settings:
Typically 25 days
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