What is the ‘Aroon Indicator’
The indicator is a technical indicator that is used to identify when trends are likely to change direction. In essence, the indicator measures the time that it takes for the price to reach the highest and lowest points over a given timeframe as a percentage of total time. The indicator consists of the “Aroon up” line, which measures the strength of the uptrend, and the “Aroon down” line, which measures the strength of the downtrend.
BREAKING DOWN ‘Aroon Indicator’
The indicator was developed by Tushar Chande in 1995 as a way to assess the strength of a trend by looking at the time that it takes for the price to reach its high and low points over a given period of time.
The two component lines are calculated as follows:
Up – ((N – Days Since N-day High) / N) x 100
Down – ((N – Days Since N-day Low) / N) x 100
The N is the number of periods used for the indicator. By default, many traders use the indicator over 25 periods.
The Up and the Down lines fluctuate between zero and 100, with values close to 100 indicating a strong trend and values near zero indicating a weak trend. The lower the Up, the weaker the uptrend and the stronger the downtrend, and vice versa. The main assumption underlying this indicator is that a stock’s price will close at record highs in an uptrend, and record lows in a downtrend.
This indicator is very similar to the index (DMI) that was developed by Welles Wilder, which is also a very popular indicator used to measure the strength of a given trend and the likelihood that it will reverse direction.