The benefit of this indicator is its ability to predict the change in trend before the standard Aroon indicator.
The Aroon Oscillator Indicator
The Aroon oscillator is based on the Aroon Indicator and simply illustrates the strength of a current trend and its potentials to last.
An oscillator has readings between -100 and 100.
When the reading is above 0 it indicates an uptrend and below a downtrend.
Aroon Oscillator = Aroon Up - Aroon Down
How the lines are calculated
Blue = ((no. of periods — no. of periods since highest close) / no. of periods) x 100
Red = ((no. of periods — no. of periods since lowest close) / no. of periods) x 100
The Aroon indicator was developed by Tushar Chande in 1995. It was developed to measure the strength of a trend and the likelihood this trend will continue. The three types of the trends are: up, down and sideways.
The indicator consists of two coloured lines that look at the number of candles since the last new high or low: Aroon up (red line) and Aroon down (blue line).
The indicator uses a scale that ranges from 0 to 100.
The 4 key levels to watch when trading are: 0, 30, 70 and 100.
The default time period is 25 but it can be adjusted to lower or higher. When set to a lower period the indicator will react quicker but can cause false signals. On a higher period setting the indicator will react slower and give fewer signals but the shifts have been confirmed over a longer time frame.
1. When the blue line crosses above the red line it is a bullish signal.
2. When the red line crosses below the blue line it is a bearish signal.
3. When the two lines move in parallel the market is trending
When the blue line reaches the 100 level the uptrend is strong and the tighter it stays to this level the stronger the uptrend. The strength is also determined by the level of the red line. It is seen as stronger if at the same time the red line remains between the 0 and 30 level.
If the blue line fluctuates between 0 and 30 level it suggests a weak trend and a possibility of a reversal.
When the red line reaches the 100 level the downtrend is strong and the tighter it stays to this level the stronger the uptrend.