The Aroon Indicator was introduced by Tushar Chande in 1995 to determine whether a security is trending or trading sideways and to measure the strength of the trend. It is designed to anticipate the changes made in the trend and the likelihood it will continue.
The Aroon Indicator composes of two lines, Aroon Up and Aroon Down.
Aroon Oscillator= Aroon Up-Aroon Down
A 14-period is used as a default parameter.
Aroon Up is the amount of periods between the start of the period and the period at which the highest high during that period occurred.
Aroon Up= (No of Periods-No of Periods since the Highest High during that time)/(# of Periods)*100
Aroon Down is the amount of periods between the start of the period and the period at which the lowest low during that period occurred.
Aroon Down= (No of Periods-No of Periods since the Lowest Low during that time)/(# of Periods)*100
The indicator is a banded oscillator that ranges between 0 and 100. When the Aroon Up is above 70, the indicator indicates a strong uptrend. Likewise, when the Aroon Down is above 70, it denotes a strong downtrend. When the Aroon Up is below 30, it signals a weak trend; when the Aroon Down is below 30, it signals the current downtrend is weakening. When the Aroon Up and Aroon Down move towards 50, the market is entering into a consolidation phase.
With regard to crossovers, when the Aroon Oscillator crosses above the zero line, it is a buy market and the beginning of a new uptrend; otherwise it is a sell market and the start of a new downtrend.