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.
Aroon UP= 100 * (period – distance to highest high) / period
How to use:
Aroon UP is composed of a line which measures the number of periods since a High.
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).
When the 25-period Aroon up line crosses above 80, it indicates that the stock is moving upwards as the high was seen recently.
BUY:Aroon UP is greater than 20.
When the 25-period Aroon up line crosses below 20, it indicates that the stock is moving downwards as the previous high was not seen recently.
SELL:Aroon up lesser than 20.
Building On Mudrex:
As discussed above, lets first write our entry/exit conditions so that we know what to do:
When the 25 period aroon up line crosses above 80 , it tells us that the high was formed not more than 5 candles ago .Thus it indicates that the stock is moving upwards as the high was seen recently.
BUY: Aroon up is greater than 80.
When the 25 period aroon up line crosses below 20 , it tells us that the high was formed more than 20 candles ago.Thus it indicates that the stock is moving downwards as the high was not seen recently.
SELL: Aroon Up is lesser than 20.
Final Strategy: The overall strategy on Mudrex looks like this
We can now run a quick back-test to see how our strategy performs.
The main assumption underlying this indicator is that a stock’s price will regularly make new highs in an uptrend. 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.