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Aroon Indicator

The Aroon indicator was developed by Tushar Chande in 1995. The Aroon indicator attempts to determine if a trading instrument is trending or not as well as define how strong the trend is. Since Chande designed this indicator to reveal the beginning of new trends, he named it "Aroon" which means "Dawn's Early Light" in Sanskrit.

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Interpretation

The Aroon indicator is constructed with two lines - Aroon(Up) and Aroon(Down). Aroon(up) is the amount of time (on a percentage basis) that has elapsed between the start of the time period and the point at which the highest price during that time period occurred. If the trading instrument is setting a new low for the given time period, Aroon(up) will be zero. However, if the trading instrument closes higher than it has during the rest of the time period, Aroon(up) will be +100. For each subsequent period that passes without another new high, Aroon(up) moves down by an amount equal to (1 / # of periods) x 100.

Technically, the formula for Aroon(up) is:
[ [ (# of periods) - (# of periods since highest high during that time) ] / (# of periods) ] x 100

For example, consider plotting a 10-period Aroon(up) line on a daily chart. If the highest price for the past ten days occurred 6 days ago (4 days since the start of the time period), Aroon(up) for today would be equal to ((10-6)/10) x 100 = 40. If the lowest price in that same period happened yesterday (i.e. on day 9), Aroon(down) for today would be 90.

Aroon(down) is calculated in just the opposite manner, looking for new lows instead of new highs. When a new low is set, Aroon(down) is equal to +100. If the stock is setting a new high for the given time period, Aroon(down) will be zero. And so on...

The formula for Aroon(down) is:
[ [ (# of periods) - (# of periods since lowest low during that time) ] / (# of periods) ] x 100

Chande states that when Aroon(up) and Aroon(down) are in close proximity to each other and decending lower that the market is consolidating and no strong trend is evident. Aroon(up) dipping below 50 indicates that the current trend's upward momentum is gone. Similarly, Aroon(down) dipping below 50 indicates that the current trend's downward momentum is gone. Values above 70 indicate a strong trend in the same direction as the Aroon (up or down). Values below 30 indicate a strong trend in the opposite direction.

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