Aroon Indicator Trading Strategy – Using the Aroon Oscillator Strategy To Find Trades
When we want to perform a technical analysis of the market, we should use both a trend detector and an oscillator, just like we learned in this article here.
The Aroon Indicator (or Aroon Oscillator) will help us to identify a trend and spot signals to enter in trades in the market.
In this article, we are going to review this indicator along with an Aroon Indicator Trading Strategy we can use to profit from both the stock market and option market. We will learn how the Aroon oscillator works, the Aroon indicator formula, and in general, how to read it and use it.
So let us get into it!
Table of Contents
What is the Aroon Oscillator?
The Aroon oscillator or Aroon Oscillator is a trend detector indicator that will help us to identify the current trend of a particular asset.
How Aroon Indicator works?
The Aroon oscillator is formed by two components that could work by themselves: the Aroon up and down indicators.
The Aroon up indicator will represent the number of days since the last high of a certain period we can select and configure.
The Aroon down indicator represents the number of days since the last low of that same period.
In the previous image, we can see the Aroon oscillator calculation over a stock price chart. The green lines represent the Aroon up indicator, while the red line represents the Aroon down indicator.
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How to read Aroon Indicator?
In order to understand how the Aroon Indicator really works, we need to know that the indicator will be oscillating between 0 and 100.
We will define an uptrend when the Aroon up stays above the 70 threshold point while at the same time, the Aroon down stays under the 30 threshold point.
However, we will define a downtrend when the Aroon up stays under the 30 threshold point, while the Aroon down is above the 70 threshold point.
In order to identify this better, we are going to be using the exact same chart before, so we can spot the uptrends and the downtrends in the graph.
As you can see in the image above, the blue rectangles will be identifying the Aroon oscillator up and down indicator trends. Those rectangles marked with a green arrow are showing a bullish trend in the price chart, while those ones that are marked with a red arrow identify a bearish trend, according to the Aroon oscillator rules.
How to trade Aroon Oscillator? – Using the Aroon Indicator Trading Strategy rules
The Aroon Indicator Trading Strategy is very simple to apply and understand. Whenever we find a crossover of both the Aroon up and down indicators, we will spot an entry point to open short and long positions in the market.
We will only need to follow two simple rules to carry out the Aroon Indicator Trading Strategy:
- When the Aroon down crosses over Aroon up, we will spot a BEARISH signal in the market.
- When the Aroon up crosses over Aroon down, we will spot a BULLISH signal in the market.
Let us take a look again at our example to fully comprehend this in the graph.
As you can see in the previous chart, the up spikes of the blue and yellow line represent the bullish signal in the Aroon Indicator Trading Strategy.
While at the same time, the down spikes stand for the bearish signals in the Aroon Indicator Trading Strategy.
How to calculate Aroon Indicator? – Aroon Indicator Formula and Calculation
The Aroon Indicator formula is divided into three parts, so let us break it down one by one. First, we will need to calculate the Aroon up and Aroon down and then subtract up to down to obtain the Aroon Indicator.
In the Aroon Indicator formula for the up and down, X is the number of periods we decide to use in our calculation. For example, in the Aroon Indicator Trading Strategy we have seen in the previous section, we used 14 candlesticks periods. So, in this case, X would be 14.
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How accurate is the Aroon Indicator Trading Strategy?
That depends on the market conditions. The Aroon Indicator Trading Strategy will be very useful if we manage to spot a trend beginning, and in our experience, it works best with a setting of 28 periods. Let us take a look at this example here:
The accuracy of the Aroon Indicator Trading Strategy is good when we spot a trend but quite questionable otherwise.
The reason is that in choppy markets, the indicator will continually be triggering false signals that will lead to bad trades.
As always, we should really test it out for ourselves in the markets we are more active and try to find if the indicator is useful to our particular trading strategy.
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Last words about the Aroon Indicator Trading Strategy
As you have seen, the Aroon Indicator Trading Strategy is quite a useful technical indicator on which we can rely when we spot a trend.
As always, we recommend you to backtest this strategy with your own tools to make sure you understand it and know how to apply it to your option trades or stock trades.
Of course, there are other technical indicators such as the TTM Squeeze indicator that will help us to identify a trend or the stochastic indicator, that will help us to jump into a current trend.
