Indicators are analysis tools that can significantly improve your trading performance. They help to recognise the trend, its strength, they also produce trading signals. Today, I will present the indicator that was designed by Tushar Chande and is known as the Aroon indicator.
The Aroon indicator
In 1995, Tushar Chande invented a system to determine whether there is a trend in the prices and what the strength of it is. He named it “Aroon” as in Sanskrit it is translated to “Dawn’s Early Light” and his indicator catch the trend as soon as it begins.
Adding the Aroon indicator to the Olymp Trade chart
To add the Aroon indicator to the price chart, you should click on the indicators icon. The list of available tools will develop. Find “Aroon” and click on it. It will appear in the separate window beneath the chart.
How the Aroon indicator looks like
There are two lines visible in the indicator’s window. One is known as Aroon Up and the other as Aroon Down.
The Aroon indicator registers the number of intervals from when the price has recorded an x-day high or low. The default period is set at 25. Aroon Up takes the number of days after the price has recorded a 25-day high. Aroon Down measures the number of days after a 25-day low.
The two lines of the indicators move together between the values 0 and 100. In the middle, there is a line with a value of 50.
How to use the Aroon indicator in trading on Olymp Trade
What makes the Aroon indicator unique is that unlike standard momentum oscillators it focuses on time relative to price. It will help to catch the beginning of a new trend, determine consolidation and correction periods as well as predict the trend reversals.
The uptrend can be identified when Aroon Up fluctuates over the line 50 and Aroon Down below it. In the downtrend, Aroon Up will move below the middle line and Aroon Down above the value of 50.
There is a trend in the market when the Aroon indicator is close to 100 and the second Aroon line gives confirmation when it moves below 30. Moreover, when one of the indicator’s lines stays for an extensive period above 70, it means the price is reaching new highs or lows regularly. Low readings reveal that the price is not forming new highs or lows.
Identifying the trend with the Aroon indicator
To identify the trend there have to be 3 conditions met.
The first one, for an uptrend, is when Aroon Up lies above Aroon Down. The second, when Aroon Up rises over 50 and Aroon Down drops below the middle line. The third condition is that Aroon Up approaches 100 and Aroon Down stays low.
To identify the downtrend, Aroon Down should be above Aroon Up. Aroon Down moves above 50 and Arron Up below it. The last stage is when Aroon Down reaches 100 and Aroon Up stays relatively low.
Two first stages do not necessarily occur in that order.
To see a visual presentation have a look at the graph below.
Identifying the consolidation period and trend reversal
The period of price consolidation can be identified when both, Aroon Up and Aroon Down fall below 50 or they fall in parallel. It can also be the case that the two conditions appear simultaneously. When the two lines stay for an extended period below 50, it indicates no new lows, not highs are formed. This is the consolidation period.
The next signal will appear when one of the indicator’s lines will break over line 50.
In our example above, it was Aroon Down that crossed the line 50 first. It reached 100 announcing the price breakout and the end of the consolidation period.
Below you will see the chart where the price consolidation is visible. Two lines of the indicator are below 50 and they drop in parallel. Then, Arron Down rises and reaches 100 shortly before the price breaks triangle support.
The Aroon indicator is a very unique oscillator. It is in a form of two lines. Depending on where they are at the moment, a trader is able to recognise the trend, its strength as well as the consolidation periods and price breakouts.
You should observe the chart carefully and follow the rules described in this article. Then, you can use an extra indicator to get the trading signals.
Make use of the demo account. It is offered to Olymp Trade users for free. It is supplied with virtual cash and can be recharged any time you need it. Moreover, there is no time limit you can trade in the demo account. So go there now or open one if you have not done it yet. Practice trading with the Aroon indicator. With time you will get the confidence in using it and you will change to the live account to earn real profits.
Wish you good luck!
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