Aroon is a leading indicator in the Forex market. It is developed by Tushar Chande in the year 1995. This indicator is composed of two fluctuating curves. Aroon consists of two indicators that are together designed to identify the trend changes in the market. This indicator spots the corrective retracements and consolidation periods and also gauges the strength of the trend. The two Aroon indicators are represented as Aroon up and Aroon down also referred to as a bullish Aroon and bearish Aroon. The indicator works by taking the Aroon indicator and subtracting by the Aroon down. Aroon up and down measures the value of the uptrend and the downtrend in the market. The value above zero indicates the uptrend, whereas a value below zero indicates the downtrend. Likewise, a cross above the zero line indicates the beginning of an uptrend and the cross below the zero line indicates the beginning of the downtrend in the market.
In the image above, the Green line is the Aroon up indicator, and the Red line is the Aroon down indicator.
What Does the Aroon Indicator Tell You?
The Aroon lines fluctuate between the zero and 100 levels. The values close to 100, indicate a strong trend and values close to zero indicate a weak market trend. The lower the Aroon up, the weaker the uptrend in the market. Aroon indicator is focused on the last 25 periods, but it can be scaled between zero and 100 periods. The Aroon up reading above the 50 means that the price made a new high within the last 12 periods. When the Aroon down is above the 50, it means price made a new low within the 12 periods. When both the Aroon lines are below the 50 value, it shows that the price is in the consolidation phase. Traders can use the Aroon up and Aroon down crossovers to generate accurate trading signals.
Aroon-Up indicator – Number of Days Since Recent 25-day High/25
Aroon-Down indicator – Number of Days Since Recent 25-day Low/25
Both Aroon-Up & Aroon-Down are multiplied by 100 to convert the result into a percentage number.
How to install ‘Aroon Indicator’ in MT4 (Step-by-step process)
By default, the Aroon indicator is not available in the MT4 terminal, but you can download it from the internet by following the below link.
Download the Aroon indicator.
Copy the indicator to your MT4 directory/MQL4/indicators/ paste here.
Click on indicators and paste it here.
Restart your MT4 terminal.
Search for “Custom Indicators” in the MT4 Navigator; it is available on the left side of the MT4.
Right-click on Aroon Indicator.
The indicator will then show up on your chart.
In the below chart, we have plotted the Aroon indicator in the USDJPY chart.
Aroon Indicator Strategies
Strategy 1 – Aroon Crossover Strategy
Traders often use the Aroon up and Aroon down indicators to determine the direction of the market. When the Aroon up crosses above the Aroon down, it means that the price is about to start the bullish move. Likewise, when the Aroon down crosses above the Aroon up line, it indicates the bearish move. However, this signal is not enough to make trading decisions in the market as it only shows that the present trend is going to change.
For more confirmation, you can use the breakout of a range or a trendline before opening a position in the Aroon indicator suggested direction.
In the GBPNZD 60 minute chart above, when the crossover happened on the Aroon indicator, prices were in a range. As the range breakout occurred, you can take sell trade.
Strategy 2 – Aroon crossover and RSI
When the Aroon indicator is above 70, and near the 100 level, it indicates a strong trend in the market. It also gives a prior indication of the future trend change. When the indicator is below the 30, and near the 0 level it indicates a weak trend in the market and also the sign of the trend reversal.
In this strategy, we combine the Aroon indicator and the RSI indicator to understand the overbought and the oversold conditions in the market.
In the above NZDUSD 60 minutes chart, the Aroon up crosses the Aroon down, and the RSI indicator also reversed from the oversold area. This is a strong buy signal. Take the profit when the RSI indicator reaches the overbought area and put the stop-loss order below the recent low in the market.
In the CADJPY 60 minutes chart below, the Aroon down crosses the Aroon up line. At the same time, the RSI indicator is giving a sharp reversal from the overbought conditions. This is a strong sell signal for us. If you had placed the trade in the right position, it would have given you 100 pip in the market. This is a proven strategy traders use around the world to generate more trading signals.
Limitations of the Aroon Indicator
The only limitation of the Aroon indicator is when you use the lower setting. Because this indicator is more prone to whipsaws and false signals when you use the lower sitting. A crossover looks good on the indicator, but it does not mean that the price will give you a big move in the market. Traders use this indicator to identify the future direction of the trend. Hence it is best to combine this indicator with other technical indicators in order to generate genuine trading signals.
Aroon is a leading indicator that helps in identifying the reversals ahead of time. By default, the setting is 14, but traders can adjust the setting according to their style of trading. However, if you are a novice trader, then go with the default setting. You can play around with the advanced settings once you gain some experience. For trading the daily timeframe, it is suggested to have a setting above 25. But if you are an intraday forex trader, it is recommended to use the default setting or any value below 14. Use the strategies mentioned above and let us know if you won any trade while using these strategies in the comments below. Happy Trading.