Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to continue the series on Technical Analysis and why it can be such an important asset for new or experienced traders. In this series I am covering some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part VII the focus will be on The Aroon Indicator.
The Aroon Indicator
The Aroon indicator is an indicator which was developed by Tushar Chande in 1995 and is used to identify trend changes and the strength of a trend of a particular asset. The indicator informs if an asset is trending or in a trading range, while also being used to show when a new trend is beginning. There are two indicators shown on the Aroon chart, known as the Aroon-Down and the Aroon-Up indicators, and combined they make the Aroon Indicator. These two lines measure the number of periods since a high or a low within the trading price of an asset, and when applied to a set period of data, it can indicate bullish or bearish price behaviour. The indicator reads from between 0 and 100 with readings above 50 seen as the predominant trend of the asset. Crossovers are also very important, with the Aroon-Up and the Aroon-Down crossing over can be an indication of an impending chance in the overall trend of the asset.
Calculating an Aroon
To calculate the Aroon Indicator a trader needs to track the highs and lows for a set period of time, generally over a period of 25 days. This is an important factor to indicate from the off with this indicator, as the other relevant data will be based against it. Once the period is chosen, a trader must:
- distinguish the highs and lows over the previous 25 periods of the given asset
- take note of the number of periods since the previous high and low of the given asset
- apply this into into the AroonUp and the AroonDown formulas as below
Aroon-Up: [(Specified Period - Number of Periods since last high in the Specified Periods) / Specified Period] x 100
Example for a 25 Period with 7 periods since the previous high would be: [(25 - 7) / 25] x 100 = (18 / 25) x 100 = 72
Aroon-Down: [(Specified Period - Number of Periods since last low in the Specified Periods) / Specified Period] x 100
Example for a 25 Period with 13 periods since the previous high low be: [(25 - 13) / 25] x 100 = (12 / 25) x 100 = 48
These results for the AroonUp and the Aroon Down would then be input into the Aroon Indicator.
How to use an Aroon
The Aroon Indicator is shown as a graph with two lines, the Aroon-Up and the Aroon-Down. The are measured between 0 and 100, and often crossover as the trends and values of both lines change. The Aroon-Up measures the set periods since the previous high was recorded within the specified period, while the Aroon-Down measures the set periods since the previous low was recorded in the specified period. When the current price of the asset is at its highest price in the set period of time, then the value of the Aroon-Up is shown as 100. When the current price is at its lowest in the set period of time, then the AroonDown is shown as 100. Otherwise the value shown for the Aroon-Up and the Aroon-Down are indicating percentages of the time since the previous high or low was recorded in the specified period.
Crossovers are very important as part of the Aroon Indicator as they can indicate that a new uptrend or downtrend may be about to start. When the Aroon-Up crosses above the Aroon-Down, it is a sign that a new uptrend may be about to happen and is considered a bullish indicator. When the Aroon-Down cross above the Aroon-Up, then it is taken as a signal that a new downtrend may be about to take place and is considered a bearish indicator.
Another factor to take into account is that when one of the indicator lines reaches 100, it means a new trend may have begun. A sample would be if the Aroon-Up is between 70 and 100 while at the same time if the Aroon-Down indicator is between 0 and 30, a new uptrend is underway. The same is applicable for a downtrend when the Aroon-Down is between 70 - 100 and the Aroon-Up is sitting between 0 and 30. When both Aroon-Up and Aroon-Down move parallel together, whether it be horizontally or sloping up or down, as long as they remain roughly the same level apart then the price is considered to be in a range.
Some traders follow the basic strategy of when the Aroon-Up is above the Aroon-Down then the market is showing bullish price behaviour. When the Aroon-Down is above the Aroon-Up then the market is showing bearish price behaviour. When a price is below 50 and the set period is 25, then it is an indication that the previous high/low was more than 50% of the period ago, or in this case 13 candles.
Below is a sample of the Aroon Indicator from the BTCUSDT 1hour chart on Binance, with a setting of 25 periods and showing the Aroon-Up as the green line, the Aroon-Down as the red line, and the candlestick chart shown above it. I have highlighted the 30 and 70 levels via white horizontal lines on the Aroon Indicator. The EMA-200 is also shown on the candlestick chart in the yellow line.
- The blue line indicates when the price was in a range as the Aroon-Up and the Aroon-Down were parallel in their movement.
- The orange line indicates when the Aroon-Up had previously crossed above the Aroon-Down, but was a false signal in that moment as not increase of note happened with the price movement. The actual price had increased prior to the crossover showing how it was too late to be used as a signal.
- However, soon after, as shown with the purple purple line, the Aroon Up remained above 70 and the Aroon-Down below 30, aa an uptrend took place.
- Finally, the pink line show when a downtrend took place as the Aroon-Down crossed above the Aroon-Up. The Aroon-Down remained above 70 while the Aroon-Up stayed below 30.
Limitations of an Aroon
The Aroon indicator can be used to signal good entry and exit points for a trade, but it can often produce poor and false signals. The poor signals can be as simple as the signal happening too late for a trader to make any beneficial trade from it as any substantial price move has already happened. Due to the fact this is a lagging indicator which makes use of previous information by looking backwards, it cannot be used as predicative in its nature.
While crossovers can be good signals and look good for traders, it does not always corelate with big price movements. The indicator does not include the size of move, only taking into account the number of days / candles since the previous high or low. Crossovers will still happen even when the price is fairly flat and in a range due to the fact new highs and lows will happen over the previous 25 periods. Traders who use the Acroon Indicator need to use it alongside other indicators along with price analysis to make correct and properly informed decisions when trading.
Conclusion on using an Aroon for TA
As a trader, whether it be day trading or long term trading, using the Aroon Indicator can be very beneficial in identifying the strength and potential changes of a trend. It makes use of two lines, the Aroon-Up and the Aroon-Down lines. These are used to determine whether the asset is in an uptrend or a downtrend and how strong the trend is relative to its most recent high or low in a set period of data. When one of the indicators is between 70 and 100 while the other is between 0 and 30 then the asset is said to be in a trend. When the lines crossover, it can be taken as an indication that a reversal in the trend may be about to take place. While the two lines are moving in tandem in a parallel direction then the price of the asset is said to be within a range. The Aroon Indicator should not be used as a standalone indicator, instead it should be used in conjunction with other indicators to give stronger results and more reliable signals.
As stated whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading. It can be easy to get caught into false signals with too many crossovers or the crossover happening too late within the Aroon Indicator. Another factor to consider is that the crossovers do not always corelate with large price action and a crossover may take place only to change direction soon after.
It is important to use the Aroon indicator along with other TA to get the correct signals for understanding the strength of a trend. Always zoom out, if trading on a 15 minute chart check the 1 hour or 4 hour or even 1 day chart to give you a better idea of the overall trend strength via the Aroon Indicator, along with checking the trend strength and signals or if a crossover of a larger trend is due to take place compared to a short term trend.
You can find the previous parts to the series here:
Technical Analysis - Part I - Exponential Moving Average (EMA)
Technical Analysis - Part II - Relative Strength Index (RSI)
Technical Analysis - Part III - Bollinger Bands (BB)
Technical Analysis - Part IV - Moving Average Convergence Divergence (MACD)
Technical Analysis - Part V - On-Balance Volume (OBV)
Technical Analysis - Part VI - The Average Directional Index (ADX)
Also feel free to check out:
I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on the The Accumulation/Distribution Indicator (A/D). Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.
Have a great day.
Peace. CryptoGod-1.
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