Business, Legal & Accounting Glossary
The Aroon Indicator, or “Dawn’s Early Light” in Sanskrit, was developed by Tushar Chande in 1995. Chande chose this name because the two up and down indicators are designed to reveal the beginning of a new trend.
The Aroon Indicator is used for identifying trends in an underlying security, determining how strong the trend is, and determining the likelihood of a trend reversal.
The 20-day Aroon-Up measures the number of days since the stock recorded a 20-day high. Likewise, the 20-day Aroon-Down indicator measures the number of days since the stock experienced a 20-day low. Chartists can use the Aroon Indicator to spot emerging trends, identify consolidations, define correction periods and anticipate reversals.
The Aroon Indicator is shown in percentage terms and fluctuates between 0 and 100. They are plotted side-by-side for easy comparison.
Both plots oscillate between 0 and +100. Trends (or lack thereof) are determined by examining extreme values of the two lines, parallel movement, and crossovers as summarized below:
Chartists often use the Aroon Indicator to identify if a stock is trending or trading flat and then use other indicators to generate appropriate signals. For example, chartists might use a momentum oscillator to identify oversold levels when Aroon indicates that the long-term trend is up.
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This glossary post was last updated: 23rd March, 2020 | 2 Views.