The Aroon Indicator
The Aroon Indicator is one of the several used by traders in the Forex Market to gauge the strength and momentum of a price trend. This indicator first points out the trends prevalent in relation to a price and the odds of the current trend suddenly reversing or changing direction. It is visually depicted to be better understood by the traders using a line chart. The strengths of both the upward and downward trends are measured and plotted on the chart, and is used to determine the period of time that will elapse while the price reaches the lowest and highest levels after starting from a given point. The time is not described explicitly and is only shown as a percentage of the total time.
Range of the Aroon Indicator and the Basic Assumption
The Aroon Indicator has a range of values from 0 to 100. The lower the value of the indicator, the weaker the trend will be. Similarly, the higher the value, the stronger the trend is. The fundamental assumption used in this oscillator is that when the market is an uptrend, the price of the currency will reach a point where it will be higher than ever before. Moreover, when the market is in a downtrend, the currency will close out at its lowest level ever.
Aroon Oscilltor
Coming back to the Aroon indicator, it is an oscillator as well; therefore. it is ideal to be used whatever the market situation may be. Though it will best work when the sideways trend is prevailing, there is no problem in using in an uptrend or a downtrend.
There is a debate raging on constantly about whether the oscillators should be used or the moving averages. Both have their respective shortcomings which have to be addressed and which limit their efficiency to be used in all market situations. It is ideal that the Forex Traders use indicators and tools which are conducive to the type of trend the Forex Market is going through at that time.
An easier way of explaining this is that oscillators are to be used when the market is in a condition that the prices are not going up or down, and instead the trend is causing sideway movements. On the other hands, moving averages are ideal in upwards and downwards trends in the Forex Market.
How to Read the Aroon Indicator
So how do you read this indicator? It is very simple and a basic knowledge of the Forex Market trends can lead you to making highly profit making decisions. The theory is simple. The range of values is 0 to 100 and the indicator moves between this range. There are two parts to the range, known as Aroon Up and Aroon Down. The up and down levels are used to indicate whether the market is in an upward trend or a downward trend.
When the up indicator is above 70 and the below indicator is below 30, the market can said to be in an uptrend. It is a strong trend and any sudden reversals or changes should not be anticipated by the Forex Traders in the current trend.
On the other hand, if the situation is opposite of this, that is the below indicator is above 70 and the up indicator is below 30, then the market is in a strong trend going downwards. Similarly, no fluctuations or changes in the trend can be expected in the short run at least.
Time Periods to be Used
There are several options for traders when it comes to using time periods for the calculation of this indicator. The ideal choice is said to be 25 time periods but it is at the trader’s discretion's that what time periods he uses. The time period should be chosen according to the strategy that the trader is using. A short term selling strategy requires the trader to use fewer time periods, like 10 or so. On the other hand if the trader is using a buy and hold approach, he should use more time periods, around 50.