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 Oscillator =Aroon Up – Aroon down

Aroon Up= 100 * (period – distance to highest high) / period

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

How to use:

The Aroon Oscillator is a trend-following indicator that uses aspects of the Aroon Indicator  to gauge the strength of a current trend.

It 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

The Aroon Oscillator can generate trade signals or provide insight into the current trend direction of an asset.When the oscillator moves above the zero line it means the Aroon Up is crossing above the Aroon Down. This means the price has made a high more recently than a low.

BUY:Aroon oscillator greater than 0.

Bearish Scenario

When the oscillator moves below zero, it means the Aroon Down is crossing below the Aroon Up. A low occurred more recently than a high, which could signal a downtrend is starting.

SELL:Aroon oscillator lesser than 0.

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 oscillator moves above the zero line it means the Aroon Up is crossing above the Aroon Down. This means the price has made a high more recently than a low.

BUY: Aroon oscillator greater than 0.

Indicator Block for Buy over Mudrex

When the oscillator moves below zero, it means the Aroon Down is crossing below the Aroon Up. 

SELL: Aroon oscillator lesser than 0.

Indicator Block for Sell over Mudrex

 Final Strategy: The overall strategy on Mudrex looks like this

Aroon Oscillator Trading Strategy over Mudrex

Testing

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

Back-Test Results for Aroon Oscillator

Improvements:

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


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