What is AROON Oscillator?
The AROON Oscillator (ARO) was developed by Tushar Chande and is similar to the Relative Strength Index. It attempts to show when a new trend is starting and is quite useful in capturing trend and identifying range-bound markets. The indicator consists of two lines – Up and Down. They measure how long it has been since the highest high or the lowest low that has occured within an n period range. You can read more about AROON in his book – The New Technical Reader. This post and the model spreadsheet shows how to use Aroon Oscillator to measure the strength of a trend.
How to Calculate AROON Oscillator?
The Aroon Oscillator is based on two separate indicators: the Aroon Up and the Aroon Down. The Aroon Up measures the number of periods since the highest high within a given time period, while the Aroon Down measures the number of periods since the lowest low within the same time period.
Aroon[up] = \{\frac{n - PeriodsFromHighestHigh}{n}\} X 100
Aroon[down] = \{\frac{n - PeriodsFromLowestLow}{n}\} X 100
What are the key takeaways from AROON Oscillator?
AROON Oscillator is a powerful tool to measure the strength of a trend. When Aroon Up value stays between 70 and 100, an upward trend is formed. When the Aroon Down stays between 70 and 100, a downward trend is formed. A strong upward trend is formed when Aroon Up is above 70 and Aroon Down stays below 30 at the same time. Similarly, a strong downward trend is formed when the Aroon Down is above 70 while the Aroon Up is below 30. Both Up and Down indicators are complementary.
For a 14 day lookback period, the highest high occurred at the 2nd candle. The Aroon Up indicator is simply calculated as:
AroonUp = ((Lookback – # of Periods since highest high) / Lookback) x 100
AroonUp = ((14 – 2) / 14) X 100 or 85.71
Both the Up and Down indicators are indicated as percentages. The main question being addressed here is – how recent are the highest high or lowest low in the past “n” lookback periods.
On the same note, the AroonDown is calculated using the lowest low in the past “n” lookback periods.
AroonDown = ((Lookback – # of Periods since lowest low) / Lookback) x 100
Both Aroon Up and Down indicators are subtracted to obtain Aroon Oscillator.
AroonOscillator = AroonUp – AroonDown
Always be on lookout for crossover. When the Aroon Up crosses above the Aroon Down, it indicates a strengthening of the upward trend. When the Aroon Down crosses above the Aroon Up, it indicates a weakening of the upward trend.
Traders can use the AROON Oscillator to identify potential trend reversals, as well as to confirm existing trends. For example, if the oscillator moves from positive territory to negative territory, it could signal a bearish trend reversal, and vice versa. It is important to note, however, that like all technical analysis indicators, the Aroon Oscillator is not infallible and should be used in conjunction with other forms of analysis.
Limitations of AROON Oscillator
AROON oscillator can signal good entry points. It can also give bad or false signals. Like all technical indicators, AROON happens to be a lagging indicator. Therefore, it is vulnerable to sudden spikes in the stock prices. Traders should have efficient exit strategy from volatilities.
Usage Instructions
Please refer to Import Stock Prices and Financial Data Directly into Excel post. I have discussed Excel and Alpha Vantage API integration with an example in length.
Download AROON Oscillator in Excel