The Aroon technical analysis indicator determines the direction a stock is moving, either upward, downward, or sideways.
When to use the Aroon Indicator
Knowing the direction a stock is moving is extremely useful to the technical trader. During periods when prices move upward or downward, trend following techniques, such as moving averages, are profitable. However, during sideways moving periods, trend following techniques work poorly. Likewise, oscillators, like the stochastic oscillator, perform very well during periods where a stock is moving sideways, but they perform very poorly when stocks trend up or down.
How to Interpret the Aroon Indicator
There are two parts to the Aroon Indicator, the Aroon up and the Aroon down. The Aroon indicator ranges from 0 to 100: when the Aroon down indicator is above the 70 line and the Aroon up indicator is below 30, then the market is trending downwards. In contrast, when the Aroon up indicator is above the 70 line and the Aroon down indicator is below 30, then the market is trending strongly upwards. Lastly, when the Aroon up and Aroon down indicator move towards the centerline (50), then the market is entering into a consolidation period. The default time period length for the Aroon indicator is 25 periods. Nevertheless, a trader can change the time period to 10-periods for shorter term trades or 50-periods for longer term trades.
A variant of the Aroon indicator is the Aroon Oscillator that combines both the Aroon up and the Aroon down into one indicator. The Aroon Oscillator is simply calculated by subtracting Aroon down from the Aroon up indicator. To interpret the oscillator, a value above 50 implies a strong up trending market and a value below -50 means that the market is trending lower. When values are near 0, the stock is trending nowhere.
Similarity to ADX Indicator
A similar technical analysis indicator to determine the trend strength of a stock is the Average Directional Movement Index (ADX). Both the Aroon indicator and the ADX determine stock trend strength. Howerver, the ADX is non-directional, it moves upward whether or not the stock is moving upward or downward. The ADX only specifies the strength of the trend of the stock. The Aroon indicator moves higher when prices move higher and lower when prices move lower. Thus the Aroon indicator is a more intuitive indicator than the ADX.
In summary, the Aroon indicator and the Aroon Oscillator are extremely helpful tools for stock traders to possess; the Aroon indicator helps traders to determine when a trend following technical analysis indicator or an oscillator technical analysis indicator is best suited for a stock trade.The following link will take you to pictures and more description of the Aroon Indicator and Aroon Oscillator
Matthew Hewlett is a contributor to the website http://www.OnlineTradingConcepts.com and specializes in using technical analysis to trade stock index futures, stock options, and stock index options.