Introduction

The Aroon indicator is a technical indicator that is used to identify trend changes in the price of an asset.

“Aroon” means “Dawn’s Early Light” in Sanskrit. Chande chose this name because the indicators are designed to reveal the beginning of a new trend. The Aroon indicators measure the number of periods since price recorded an x-day high or low. There are two separate indicators: Aroon-Up and Aroon-Down. A 25-day Aroon-Up measures the number of days since a 25-day high. A 25-day Aroon-Down measures the number of days since a 25-day low.

Indicator type

Trend, Oscillator.

Formula

Aroon Down= 100 * (period – distance to lowest low) / period

How to use:

Aroon down is composed of a line which measures the number of periods since a Low.

Generally it is used with a look back period of 25.

It is a variation of the AroonUpDown indicator which shows the current difference between the AroonUp and AroonDown value, trying to present a visualization which indicates which is stronger (greater than 0 -> AroonUp and less than 0 -> AroonDown).

Bullish Scenario

  • When the 25 period Aroon down line crosses below 20, it indicates that the stock is moving upwards as the previous low was not seen recently.

BUY: Aroon Down is lesser than 20.

Bearish Scenario

  • When the 25-period Aroon down line crosses above 80, it indicates that the stock is moving downwards as the low was seen recently.

SELL: Aroon Down greater than 80.

Building On Mudrex:

You can create strategies on Mudrex using simple ‘blocks’. You can connect multiple blocks and define conditions on those connections or ‘paths’ to create your strategy on Mudrex.

As discussed above, lets first write our entry/exit conditions so that we know what to do:

When the 25-period Aroon down line crosses below 20, it tells us that the low was formed at least 20 candles ago. Thus it indicates that the stock is moving upwards as the previous low was not seen recently.

BUY: Aroon Down is lesser than 20.

Indicator Block for Buy Signal over Mudrex

When the 25-period Aroon down line crosses above 80, it tells us that the low formed less than 5 candles ago. Thus it indicates that the stock is moving downwards as the low was seen recently.

SELL: Aroon Down is greater than 80.

Indicator Block for Sell Signal over Mudrex

Final Strategy: The final strategy on Mudrex looks like this

Aroon Down Trading Strategy over Mudrex

Testing

We can now run a quick back-test to see how our strategy performs.

Back-Test Results for Aroon Down

Improvements:

The main assumption underlying this indicator is that a stock’s price will regularly make new lows in a downtrend. If the assumption proves out to be wrong, this strategy may give us false entries. However, indicators can be proved very effective when combined with other indicators and one can create profitable strategies using Aroon on Mudrex.


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