Aroon Oscillator

The Aroon Oscillator was developed by Tushar Chande to highlight the start of a new trend and to measure trend strength. Chande first described the indicator in the September 1995 issue of Stocks & Commodities magazine. The Aroon indicator system consists of three lines: Aroon Up, Aroon Down, and the Aroon Oscillator which reflects the difference between the two. "Aroon" is a Sanskrit word meaning "dawn's early light".

Aroon Trading Signals

The Aroon Up and Aroon Down indicators signal the start of a new trend. Chande recommends the following signals:

  • Aroon Up above 70 indicates a strong up-trend.
  • Aroon Down above 70 indicates a strong down-trend.
  • Aroon Up below 50 warns that the up-trend is weakening.
  • Aroon Down below 50 signals that the down-trend is weakening.
  • The two moving lower in close proximity indicates consolidation, with no clear trend.

Trading signals for the Aroon Oscillator:

  • Above zero signals an up-trend.
  • Below zero indicates a down-trend.
  • The farther away Aroon Oscillator is from the zero line, the stronger the trend.

Example

The CRB Commodities index is shown with Aroon Up and Aroon Down. The 63-Day Exponential Moving Average is used as a filter: only take long signals above the moving average and only take short signals below.

Aroon Down Indicator Go short when Aroon Down crosses to above 70 while below the 63-Day MA Exit when Aroon Down retreats below 50 Do not go long when Aroon Up crosses above 70 because price is below the 63-Day MA

Mouse over chart captions to display trading signals.

  1. Go short [S] when Aroon Down [red] crosses to above 70 and price is below the 63-Day moving average.
  2. Exit [X] when Aroon Down retreats below 50.
  3. Do not go long at [?] because price is below the 63-Day moving average.
Aroon Up Indicator Go short when Aroon Down crosses to above 70 and price is below the 63-day MA Exit when Aroon Down retreats below 50 Go long when Aroon Up crosses above 70 and price is above the 63-day MA Exit when Aroon Up retreats below 50 Do not go short as price is above the 63-Day MA, instead go Long when Aroon Up crosses above 70 Exit when Aroon Up retreats below 50; or if Aroon Up crosses below Aroon Down while above 50. The next short trade is stopped out when price reverses above the MA Go Long when Aroon Up crosses above 70 and price is above the 63-Day MA

Mouse over chart captions to display trading signals.

The next few months are shown in greater detail.

  1. Go short [S] when Aroon Down [red] crosses to above 70 and price is below the 63-Day moving average.
  2. Exit [X] when Aroon Down retreats below 50.
  3. Go long [L] when Aroon Up [blue] crosses above 70 and price is above the 63-Day moving average.
  4. Exit [X] when Aroon Up retreats below 50.
  5. Do not go short when Aroon Down crosses above 70 because price is above the 63-Day moving average.
    Go Long [L] the next day when Aroon Up [blue] crosses above 70 and above Aroon Down.
  6. Exit [X] when Aroon Up retreats below 50.
    If Aroon Up had to cross below Aroon Down while above 50, this would also signal an exit.
  7. Do not go short when Aroon Down crosses above 70 because price is above the 63-Day moving average. This trade is stopped out when price reverses above the moving average 9 days later.
  8. Go long [L] when Aroon Up crosses above 70 and price is above the 63-Day moving average.

Setup

The default time period for the Aroon indicators is 25 Days.

See Indicator Panel for directions on how to set up an indicator — and Edit Indicator Settings to change the settings.

Aroon Formula

  1. Determine the time period ("n")
  2. Count back the number of days from the end of the period to the highest high for the period ("HH")
  3. Calculate Aroon Up using the formula [( n - HH )/ n ] x 100%

For example, if the period is 25 days and the highest high is today (HH=0), Aroon Up = (25-0)/25 x 100% = 100%. If the highest high occurred 10 days ago (HH=10), then the current value would be (25-10)/25 x 100% = 60%.

  1. Count back the number of days from the end of the period to the lowest low for the period ("LL")
  2. Calculate Aroon Down using the formula [( n - LL )/ n ] x 100%

Now that we have Aroon Up and Aroon Down we can calculate the Aroon Oscillator:

  1. Subtract Aroon Down from Aroon Up.

Aroon Evaluation

A weakness was highlighted in the earlier example when price made a false breakout. The chart below shows the false signal. Aroon Down rises to 100% when a long tail makes a new 25-day low. Aroon Down highlights the low, but the strong close is a bull signal, indicating buying support.

Aroon Directional Movement Comparison

Mouse over chart captions to display trading signals.

I am impressed, however, with the responsiveness of Aroon Up and Aroon Down. Results are comparable to the acclaimed Directional Movement System when set for a similar period.

The CRB index chart below shows signals from the Aroon system (and 63-Day exponential moving average) on the price chart — and Directional Movement (25-Day) below. The shorter-period 14-Day Directional Movement System was discarded as it gave too many false signals. Responsiveness of the two indicators is similar, with identical entry points at [S]. Directional Movement keeps you in the trend longer, but perhaps too long in this case. Performance of either system is enhanced by use of the long-term moving average as a filter.

Aroon Directional Movement Comparison Go short when Aroon Down crosses to above 70 while below the 63-Day MA Exit when Aroon Down retreats below 50 Go short when Aroon Down crosses to above 70 Exit when Aroon Down retreats below 50 Go long when Aroon Up crosses above 70 Go short when DM- is above 25 and crosses above DM+ Exit when DM- crosses below DM+

Mouse over chart captions to display trading signals.

While impressed with Aroon Up and Aroon Down, I do not find the actual Aroon Oscillator particularly useful as a measure of trend strength.