Aroon Indicator : Download FREE with video Guide (MT4/MT5)
Aroon indicator is a custom indicator that belongs to the oscillators’ category. It was developed in 1995 by Tushar Chande, CEO of the “Tuscarora Capital Management” company, and the author of the books called “Beyond Technical Analysis” – “how to develop and Implement a winning trading system” and “The New Technical Trader” – “boost your profit by plugging into the latest indicators”. Moreover, this indicator estimates the interval of time between the ongoing highs and lows. In this course, we will discuss the Aroon indicator for MT4 and MT5 platforms, explain how to use and trade with it in the Forex market, and how to calculate it.
What is aroon indicator ?
Aroon, also known as Aroon up and down is a direction following strategy. It is employed to determine the strength and the direction of a market. Moreover, it doesn’t base on price movements but on the number of periods since the price registered high or low on n days. This is because Aroon based on the concept that the upward direction market will produce new highs and downward direction markets will produce new lows. In fact, this oscillator is a set of two indicators. Arron-up, which calculates the number of days since the recent 25-day high. And Arron-down, which calculates the number of days since the recent 25-day low. This why considered a unique indicator, as it concentrates on time relative to price.
Calculating the Aroon MT4 indicator is not complicated. Moreover, it is not necessarily to make this calculation as the indicator is calculating automatically on charting platforms. but you need to understand it because that will help you to trade easily with this indicator. Thus, Simply you need to follow these steps:
- Choose the lookback period. You can use the default setting which is 14 days, or 25 days as recommended by Tushar chande.
- Follow the highs and lows of the security price for the past n periods.
- Record the time elapsed since the last highs and lows.
- Apply these numbers in the computations of the Aroon-up and Aroon-down:
Aroon-up= [ ( n – number of periods since highest high ) / n ] * 100
Aroon-down= [ ( n – number of periods since lowest low ) / n ] * 100
*n: the number of periods.
How to trade with this indicator ?
To trade with the Aroon MT5 indicator you need to keep an eye on the two lines placed at the bottom of the chart. According to the movement of these lines, Forex traders can make decisions. When the Aroon upper line passes overhead the Aroon lower line (down), then it is a signal of an uptrend. Contrarly, when the Aroon down passes overhead the Aroon up this is a signal of a downward direction. If the indicator moves higher than 70, it indicates a strong movement. While moves lower than 30 indicate a weak movement. Moreover, movements between 30 and 70 are a signal that the market is unstable. For instance, if Aroon-up is higher than 70, while the Aroon-down is lower than 30, then the direction is certainly upward.
Crossover between the Aroon up and down indicators gives confirmations. For instance, if the Aroon-up is between 70 and 100 crosses the Aroon-down which is between 0 and 30, then an upward direction is confirmed. On the other hand, if the bearish indicator (Aroon-down) is between 70 and 100, and the bullish indicator (Aroon-up) is between 0 and 30, then a downward direction is confirmed.
When Aroon-up and Aroon-down move with each other in parallel at almost the same level, this is a signal that there is ranging trade or consolidation.
This indicator sets an oscillator below the main chart, as you can see in the picture below, which contains two lines that move high and low. An up line which is in blue corresponds to Aroon-up, and a down line which is in red corresponds to Aroon-down. you can change these default colors to your preference in your MetaTrader 4 platform.
Advantages and disadvantages
Aroon indicator like any indicator has strengths and weaknesses, which are mentioned below:
- Simple and easy to understand: Forex traders can interpret and calculate the Aroon lines easily.
- Flexible in choosing the time period: Forex traders can change the time period for calculating the Aroon lines in terms of how frequently they trade.
- Signals the change in directions effectively.
- It is a lagging indicator as it is based on historical data.
- Impacted more by time than price movements. This is why it does not provide any information about the volume of change that can happen.
- Should combine it with other indicators, because alone does not always provide accurate signals.
Aroon indicator for MT4 and MT5 platforms is very simple and easy to use. It enables Forex traders not only to identify the direction and the strength of a movement, but also shows the period of consolidation and potential reversal. Otherwise, this technical tool sometimes gives false signals, which is why is recommended to use in combination with another indicator.