What Is the Aroon Oscillator?
Let me tell you directly: the Aroon Oscillator is a trend-following indicator that draws from the Aroon Indicator's components, specifically Aroon Up and Aroon Down, to assess the strength of a current trend and its likelihood of continuing.
Key Takeaways
You need to know that the Aroon Oscillator relies on Aroon Up and Aroon Down to form the oscillator itself. These measure the number of periods since the last 25-period high and low. When the oscillator crosses above the zero line, it happens because Aroon Up moves above Aroon Down, and it drops below zero when Aroon Down moves below Aroon Up.
Understanding the Aroon Oscillator
If you're looking at Aroon Oscillator readings above zero, that indicates an uptrend is in play, while readings below zero point to a downtrend. You should watch for zero-line crossovers as they signal potential trend changes, and big moves above 50 or below -50 can indicate strong price momentum.
I developed the Aroon Oscillator in 1995 as part of the Aroon Indicator system to highlight short-term trend changes—note that the name comes from Sanskrit, meaning something like 'dawn’s early light.' The system includes Aroon Up, Aroon Down, and the Oscillator. You calculate Aroon Up and Down first, typically over 25 periods, though you can adjust that timeframe. More periods mean fewer waves and a smoother look; fewer periods give more waves and quicker responses. The oscillator ranges from -100 to 100, with high values signaling uptrends and low values signaling downtrends.
Aroon Up and Down each range from zero to 100, and higher values mean stronger trends. For instance, if a price hits a new high one day ago, Aroon Up would be 96—calculated as ((25-1)/25) x 100. The same logic applies to Aroon Down for new lows. These indicators have an inverse relationship: when one rises, the other typically falls.
In an uptrend with consecutive new highs, Aroon Up stays high, keeping the oscillator positive. In a downtrend with new lows, Aroon Down dominates, pushing the oscillator lower. You can chart the oscillator with or without the Up and Down lines, and significant directional changes in it can help spot new trends.
Aroon Oscillator Formula and Calculation
Here's the formula you use for the Aroon Oscillator: it's simply Aroon Up minus Aroon Down. Aroon Up is 100 times (25 minus periods since the 25-period high) divided by 25. Aroon Down is 100 times (25 minus periods since the 25-period low) divided by 25.
To calculate it step by step: first, find how many periods have passed since the last 25-period high, subtract from 25, divide by 25, and multiply by 100 for Aroon Up. Do the same for Aroon Down using the last low. Then subtract Down from Up to get the oscillator value. Repeat this as each period ends.
This differs from something like the rate of change indicator, which tracks momentum by comparing current prices to past ones, whereas the Aroon focuses on how recently a 25-period high or low occurred.
Aroon Oscillator Trade Signals
The oscillator can give you trade signals or insights into an asset's trend direction. When it moves above zero, Aroon Up is crossing above Aroon Down, meaning a high happened more recently than a low, which signals an uptrend starting. When it drops below zero, Aroon Down crosses below Up, indicating a recent low and the potential start of a downtrend.
Limitations of Using the Aroon Oscillator
This indicator keeps you in trades during long-term trends, as prices hitting new highs in an uptrend will hold the oscillator above zero. But in choppy markets, it can give poor signals with the price and oscillator whipping back and forth.
It might signal trades too late, after the price has already moved significantly, potentially right before a retracement. The 25-period choice is arbitrary, and there's no guarantee that a recent high or low within that window means a sustained trend.
You should use it alongside price action analysis, long-term trading fundamentals, and other technical indicators. Remember, this isn't investment advice—investing carries risks, including loss of principal, and it's not tailored to your specific situation.
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