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Trading on Cryptocurrency Bitcoin/Etherium with Aroon

The Aroon indicator is comprised of two separate indicators: Aroon up and the Aroon down. Aroon up is calculated based on the length of time since a particular security or index has reached a recent high. Conversely, Aroon down is a measurement of time since a recent low. Both indicators are then plotted as lines on a range of zero to 100, placed underneath a bar or candlestick chart.

The Aroon system was developed by Tushar Chande in 1995 as a way to identify the end of a current trend and the beginning of a new one. Its secondary use is as a trend strength indicator.

Aroon up, considered the bullish Aroon, is calculated as follows:

  • {((number of periods) – (number of periods since highest high)) / (number of periods)} x 100

Aroon down, the bearish Aroon, uses this formula:

  • {((number of periods) – (number of periods since lowest low)) / (number of periods)} x 100

The highest high and lowest low being measured do not necessarily represent the all-time highest price or all-time lowest price. Instead, they indicate the highest and lowest prices over a predetermined length of time. For example, a 60-day Aroon indicator would have the number of days since the high and the number of days since the low during that 60-day period. Any older prices are ignored.

Aroon values decline as time elapses since the most recent high or low. A value of 50 is the cut-off point and means that the new high or low occurred during the exact middle of the time period in which the Aroon is being applied. With the 60-day example, an Aroon down reading at 50 means that the lowest low occurred 30 days ago.

One of the primary goals of technical market analytics is to identify performance trends in individual securities or indexes. The goal is that buying and selling opportunities can be identified before they are realized, allowing the savvy investor to time the market effectively. The Aroon indicator, a lesser-known technical tool developed by Tushar Chande in 1995, is used to locate trends early and show the likelihood that the trend will reverse.

At first glance, the Aroon indicator resembles the directional movement index. It plots multiple lines on a chart with moving values between zero and 100, all below the actual price movements of a security that are normally presented in candlestick style. The two lines on the Aroon indicator are called the “Aroon Up” and “Aroon Down,” and the relationship between these two establishes the foundation for any trading strategy built on the Aroon indicator.

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The Aroon Up represents the market’s upward momentum. Larger values indicate a stronger movement, while low values express very little upward movement. The Aroon Down is interpreted the same way, only it demonstrates the strength of a downward movement. By their very nature, Aroon Up and Aroon Down tend to have an inverse correlation.

Part of the strength of the Aroon indicator is its simplicity: When Aroon Down is trending higher than Aroon Up, the price of the stock is expected to lose value. The opposite is true when Aroon Up is trending higher than Aroon Down. You would look to establish bullish or bearish outlooks on stocks based on the patterned relationship between the two lines. You can apply long and short strategies whenever trends do present themselves, trading long when the Aroon Up has strong values (50+) and trading short when Aroon Down has strong values.

You can also turn the Aroon indicators into a technical oscillator. To do so, make the bullish indicator range from 100 to zero and the bearish indicator from zero to -100, and then solve for the difference between the two values. This allows you to distinguish between trending markets and range-bound markets, which present less opportunity than trending markets.

Once you learn to read the oscillator, establish some cut-off ranges. For example, any values between -30 and 30 are not likely to indicate strong trends (with a value of zero showing no trend whatsoever), and you should most likely avoid making moves on weak trending markets. Instead, aim for trends that are either bullish (greater than +50) or bearish (less than -50).

The Aroon indicator improves the efficiency of your trading decisions. Theoretically, you should be able to identify the opportunity cost of jumping into a trend too early or too late. The Aroon indicator can also help you understand when to look for alternative opportunities during sideways markets.

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