In 1995 Tushar Chande developed the Aroon indicator.
Designed to identify the beginning of a new trend, Chande gave it the name Aroon, which means "Dawn's Early Light" in Sanskrit.
The Aroon indicator measures the number of periods since price recorded a (specific #) day high or low. So a 50 day Aroon measures the number of days since a 50 day low.
Most other momentum oscillators focus on price relative to time, Arron flips this on it's head by focusing on time relative to price.
The Aroon can be used to spot emerging trends and trend reversals, as well as identifying correction and consolidation periods.
Aroon declines as the elapsed time between a new high or low increases. 50 is the cut off point. Because 12.5 days marks the middle, a reading of exactly 50 is impossible on a daily chart. However, it is possible with other time frames.
On daily charts, Aroon is either below 50 (48) or above 50 (52). A reading above 50 means a new high or low was recorded within the last 12 days or less.
This is the most recent half of the look-back period. A reading below 50 means a new high or low was recorded within the last 13 days or more [(25-13)/25 x 100 = 48). This is the latter half of the look-back period.
Basically, watch for a cross above the zero line which suggests the beginning of a new uptrend. Or, a cross below zero would indicate the start of a downtrend. Readings near zero suggest that the stock may be trending sideways and that this period of correction or consolidation could continue.
As with all other indicators, don't just rely on the defaults, adjust your indicators to suit the stock you are looking at and your trading style.
Typically shorter look backs (lower #'s on your indicators) give you quicker signals which is good for aggressive traders, while longer look backs (higher #'s on your indicators) give slower but more reliable signals for traders who are more conservative.
As we always say: "Don't use your hard earned cash to find out what kind of trader you are, use a virtual account for that."
Links for free virtual trading sites can be found on our Resources page:
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The Default Aroon is calculated using the following formula:
Aroon Up = ((25 - Days Since 25-day High)/25) x 100
Aroon Down = ((25 - Days Since 25-day Low)/25) x 100