For traders, the most exciting area is identifying the emergence of a new trend, the breakdown of the previous trend, and the reversal that leads to fresh market movement. Catching a trend early allows traders to enter the market with minimal risk and maximize potential profit.
Various indicators have been designed to identify trends and trend reversals. The most commonly used ones include moving averages, Bollinger Bands, MACD, and Stochastic oscillators.
The Aroon indicator is a relatively new tool designed to identify trends, their strength, and direction. It also helps signal the formation of a new trend or the absence of one, allowing traders to adjust their strategies accordingly.
Trading Strategy Using the Aroon
The Aroon Oscillator is based on two main components: the Aroon Up and Aroon Down indicators. These two lines measure the time it takes for the price to reach the latest high or low over a specific period.
- Aroon Up tracks the number of periods since the last high.
- Aroon Down tracks the number of periods since the last low.
The oscillator is calculated using the formula:
Aroon Oscillator = Aroon Up – Aroon Down
The resulting value ranges from +100 to -100.
- A positive value indicates an uptrend.
- A negative value signals a downtrend.
How the Aroon Indicator Works
When the Aroon is close to +100, it shows that the market is in a strong uptrend, with recent price changes reaching new highs. When the oscillator is near -100, it signals a strong downtrend, where the price is making new lows. A value near zero suggests that the market is consolidating or moving sideways without a clear trend.
How to Calculate the Indicator
The Aroon Up line corresponds to the number of bars since the last high and is calculated using the formula:
(N – H max) / N * 100%
where N is the indicator period (number of bars) and H max is the number of bars since the last high in the selected timeframe.
After reaching a new high, Aroon Up returns to 100%.
Aroon Down shows the number of bars since the last low and is calculated using the formula:
(N – H min) / N * 100%
where H min is the number of bars since the last low.
If the price forms new highs more frequently than new lows, the Aroon Up line will be above the Aroon Down line, and vice versa. For downward trends, new lows will dominate.
For example, if with a 14-period setting, the price reaches a new high today, the Aroon Up value will be:
((14-0)/14) * 100 = 100
If the last high was four days ago, the Aroon Up line will be at 71. The Aroon Down line is calculated similarly.
When no new highs or lows are reached during the period, the corresponding line moves closer to zero.
Aroon Indicator Settings
The Aroon indicator is not included by default in most trading platforms, but it can be downloaded and added to any chart. Once installed, it will appear in the list of custom indicators.
The main setting is the period, which is set to 14 by default but can be adjusted to fit different instruments and timeframes.
Building a Trading Strategy Using the Aroon
1. Trend-Following Strategy
The Aroon Oscillator is excellent for identifying the start of a new trend and confirming its strength. Here’s how to use it for trend-following:
- Buy Signal: When the oscillator rises above zero, it indicates that Aroon Up is stronger than Aroon Down, signaling a potential uptrend. This can be a good time to open a long position in binary options.
- Sell Signal: When the oscillator drops below zero, it suggests that Aroon Down is dominant, signaling a downtrend. This is the ideal moment to open a short position in binary options.
In a trend-following strategy, it is important to stay in the trade while the oscillator remains in the positive zone (for long positions) or the negative zone (for short positions) and exit when it crosses zero.
2. Trend Reversal Strategy
You can also use the Aroon Oscillator to spot potential trend reversals, which can be highly profitable if timed correctly:
- Bullish Reversal: If the Aroon Oscillator has been in the negative zone but then crosses above zero, it may indicate that the downtrend is weakening and an uptrend is starting. In this case, a long position in binary options can be opened.
- Bearish Reversal: When the oscillator, previously in the positive zone, crosses below zero, it may signal the start of a downtrend. This is a signal to open a short position in binary options.
3. Combining the Aroon Oscillator with Other Indicators
To improve signal reliability, consider combining the Aroon Indicator with other technical instruments, such as:
- Moving Averages: Use moving averages to confirm trends. For example, if the Aroon Oscillator signals a buy, ensure the price is trading above a long-term moving average to confirm the strength of the trend.
- Relative Strength Index (RSI): Combine the Aroon Oscillator with RSI to check for overbought or oversold conditions. If Aroon signals a trend reversal and RSI shows oversold (below 30) or overbought (above 70) levels, this adds confidence to the trade.
- ADX (Average Directional Index) – measures trend strength. If ADX is above 25 and Aroon Up dominates Aroon Down, it signals a strong trend.
- Stochastic Oscillator – helps spot potential reversals. For example, if Aroon Down indicates a downtrend but Stochastic is in the oversold zone, a bounce may occur.
- OBV (On-Balance Volume) – If Aroon Up gives a bullish signal and OBV is rising, it confirms liquidity inflow into the asset.
The Aroon Oscillator is a versatile and reliable indicator for trend identification and can be effectively used on the SabioTrade platform. By understanding its signals and incorporating it into your trading strategy, you can maximize your chances of identifying strong trends and accurately timing market entries and exits.
Be sure to test the Aroon Oscillator in combination with other tools and adapt your strategy based on your trading style, whether it’s trend trading, swing trading, or scalping. With the right approach, this oscillator can help improve your trading efficiency and decision-making process.
Pros and Cons of the Aroon Indicator
Every tool has its strengths and weaknesses.
Advantages of Aroon:
- Suitable for any market and timeframe.
- Simple settings.
- Easy and logically understandable signal interpretation.
- Works well in combination with other tools for building trading strategies.
Disadvantages:
- Signal lag.
- Not very common; descriptions of the Aroon indicator are limited.
- Not pre-installed by default, requiring manual installation.
Conclusion
Aroon is a versatile technical tool suitable for various markets and timeframes.
The indicator is effective in trend trading, allowing traders to identify the start of directional movement, assess its strength, and detect trend reversals.
Traders use Aroon to enter the market at the beginning of a trend and exit when the trend loses strength.
Trend trading offers several advantages, enabling traders to profit in a predictable market while managing risks effectively.
However, one should not blindly jump into the market based on the first signal. Any indicator is just an auxiliary tool, and it is important to keep this in mind!
