Technical Analysis Crash Course: Aroon Indicator

The Aroon indicator indicates if a price is trending or is in a trading range. It can also reveal the beginning of a new trend, its strength and can help anticipate changes from trading ranges to trends.

To delve deeper into the Aroon indicator, just know that there are two lines present with both lines oscillating between 0 and 100. The two lines are known as the Aroon-Up and Aroon-Down lines.

Why those lines? Because the indicate what trend is currently in force.

Basically, the two lines indicate how long it has been since the stock price created a new high or low for the defined time period. Most traders use the 25-day period but it best to test out different time periods to see which one works best for you.

For this article, we will stick with the 25-day period.

If a stock creates a new high within the 25-day period, then the Aroon-Up line will be at 100. But as time passes and the stock does not create new highs, the Aroon-Up line will slowly but surely begin to trend down towards 0 until a new high is created.

Likewise, if a stock hits a new low for the 25-day period, the Aroon-Down line will hit 100. And as with the Aroon-Up line, the Aroon-Down line will trend lower and lower until a new low is created.

As for the ‘trend indicator’ aspect, it is generally accepted a new uptrend might begin soon if the Aroon-Up crosses above the Aroon-Down. And a new downtrend is predicted to start once the Aroon-Down line crosses above the Aroon-Up line.

So how do you actually trade the Aroon?

Well, whenever you see one of the lines crossing the other one, you open a trade in that predicted direction.
We can look at the below chart of Bidvest (BVT) for some practical examples:

Shoprite RSI

As you can see when looking at the first circle, the Aroon-Up line (green) crossed the Aroon-Down line (red).

That was the signal to go long on BVT and it would have been the right call as BVT proceeded to go from almost R230 a share to over R260 a share.

Then, when looking at the second circle, the Aroon-Down line crossed the Aroon-Up line, giving us a signal to go short. And as you can see, BVT proceeded to go into an extended downtrend.

But here comes the usual caveat. These signals are not 100% correct. We would like them to be, but that would be just too easy. But you can see it on the chart. There were a couple of false signals as well so it is always prudent to combine indicators so you can get multiple readings. The combination of information from multiple indicators will help you filter out the bad signal from the good ones.

Luckily for you, the Rand Swiss trading platform comes with dozens of indicators which can help you do exactly that. And even better than that, you can link your account to your Tradingview account where you can find even more indicators.

To open a trading account with Rand Swiss, you just need to complete our mandate and send us your FICA. We will get your account open within a day and then you just need to deposit the minimum R25,000 into your account and you can begin trading.

One of our brokers will be happy to assist you in setting up the platform and help you place your first few trades.

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