Accurately forecasting the turning points in the market is the dream of every investor and trader. Every trader worries about the strength of the trend and when it will weaken and change. In this post we are going to discuss what is an Aroon Indicator and how to trade with it. Aroon is a Sanskrit word that means transition from night to day. You can judge from the name of this indicator that it tries to determine whether the trend has changed or not. In the screenshot below you can see this indicator making the X pattern just below the red arrow and price drops 300 pips.
Aroon Indicator is not much familiar to many traders. Aroon is a simple indicator that was developed by Tushar Chande in 1995. Most the time traders don’t know how to distinguish a short term trend retracement from a long term trend change. This indicator is helpful when it comes to distinguish between a long term trend and a short term retracement. Did you read the post on how to trade market reversals using daily and weekly candles?
How The Aroon Indicator Is Calculated?
Before we proceed it is important for us to know how Aroon Indicator is calculated. Aroon indicator is a combination of 2 lines that are calculated using the following formula:
- Bullish Aroon Up = [Number of periods – Number of periods since highest high] / (Number of periods)] x 100
- Bearish Aroon Down= [Number of periods -Number of periods since lowest low] / (Number of periods)] x 100
You can see the above formula is very simple. In the above formula you can see there are 2 lines in this indicator. One is the Bullish Aroon Up line and the other Bearish Aroon Down line. The 2 lines are colored differently so that you can distinguish between them. You choose your number of periods. Number of periods can be 10, 20, 30, 40, 50, 100 etc. So the number of periods is the window that you choose for taking a look at the price chart. Typical values chosen for this window are 14 or 25.
Download Aroon Indicator FREE
Now you will not find this indicator on MT4. However you can download Aroon Indicator here and install it on MT4. When you install this indicator you will have to choose the number of periods. As said above, number of periods is the window used to make the calculations. Usual values are 14 or 25. But you can choose other values as well for the number of periods.
Once you have chosen the number of periods, the formula finds the highest high that was made during the number of periods and subtracts it from the number of period that you have selected. In the same manner, in case of a downtrend, you subtract the number of periods since the lowest low from the number of periods, divide it by the number of periods and multiply it with 100. Trading is all about finding the turning points in the market. Fibonacci levels are used by pro traders to determine the turning points in the market. Read the post on how to use Fibonacci Levels in trading. This indicator has 2 extreme values 100 and 0. As said above values above 70 mean strong trend and values below 30 means no trend or weak trend.
A Simple Aroon Buy/Sell Trading Strategy
Watch the video below that explains the Aroon Indicator.
In the above video you can hear Mark Ursell clearly explain his Aroon Indicator Buy/Sell Strategy. When price is above 200 EMA and Aroon Up crosses above 30, this is a buy signal. In the same manner, when price closes below 200 EMA and Aroon Down crosses above 30, you are going to sell. When Bullish Aroon Up line crosses below 70, you should close the buy trade. In the same manner, when Bearish Aroon Down line crosses below 70, you should close the sell signal. You can use this indicator in both a trending as well a range bound market. When Aroon Up and Aroon Down lines are parallel, it is an indication that the market is range bound. When this indicator makes an X pattern, it is a strong trend reversal signal.
What Is The X Pattern?
The key levels are 30 and 70. Reading above 70 indicate a strong trend while reading below 30 means ranging market. When Aroon Up line is above 70, uptrend is strong. Similarly when Aroon Down line is above 70, downtrend is strong. When the bullish line crosses the bearish line, it forms an X pattern. When the bullish Aroon Up line crosses Bearish Aroon Down line from below, it a signal for a bullish breakout. In the same manner, when bearish Aroon Down line crosses from below Bullish Aroon Up line, it is a bearish breakout signal.
This X pattern can be an important breakout signal. Number of periods is an adjustable window. You can choose any window that you want. You can use this indicator on any timeframe. Watch this video interview in which a professional trader explains how to trade on daily and weekly charts. Regarding the X pattern, it is very important that the 2 lines cross each other between 30 and 70 levels for a valid signal. If the 2 lines cross each other above 70 or below 30, you should ignore this crossover. Watch the video below that explains how you are going to trade with this X Pattern.
https://www.youtube.com/watch?v=HOfnMufamAM
In the above video, X Pattern has been explained in detail. It is important for you to understand that the X pattern forms between 30 and 70 meaning the 2 lines to cross between 30 and 70 for a valid breakout signal. If the crossover occurs above 70 or below 30, it is not a valid signal. You can read this post in which we explain in detail a GBPUSD news trade that made 350 pips in 4 hours. Trading is all about reading the charts correctly.