Today we will talk about a useful technical analysis tool for Forex trading – Aroon indicator, the use of which allows to determine both local highs and lows of the price on the chart and, accordingly, have clear signals for opening a trading position.
Aroon indicator is designed to identify market trends and price movement direction. The essence of this indicator is to identify and display changes in the market trend towards weakening or strengthening within a certain period of time.
Let me remind you that having downloaded this technical tool, we copy the indicator to the folder “experts /” and restart the MetaTrader 5 terminal. After that, in the “Navigator” window in the “Custom Indicators” tab, we find the Aroon indicator and then move it to the price chart of the traded currency pair.
The Aroon indicator consists of three parameters, on the basis of which the algorithm of its work is built:
“AroonPeriod” – shows the value with N periods (in bars) to determine the maximum and minimum price values on the chart.
“SoundAlert” and “MailAlert” – form visual and audible signals of the indicator, for clarity and convenience in trading.
Aroon Indicator determines the current state of the market: upward, downward trend or market consolidation.
The indicator is graphically displayed by two lines, the blue “AroonUp” line and the red “AroonDown” line:
AroonUp – determines and shows the number of periods that have passed since the formation of the price maximum.
AroonDown – determines and displays in periods the time that has elapsed since the price reached its minimum values.
At the same time, the indicator values range from 0 to 100 and contain conditionally three levels (30%, 50% and 70%, respectively). A higher indicator value shows both a high (for “AroonUp” line) and a low (for “AroonDown” line) trend in the market depending on the signals interpretation.
How does Aroon indicator work, line drawing principle
For example, in a sliding window displaying the specified trading period, the maximum price is fixed on the first day of the selected period. In this case the “AroonUp” indicator is 100%. But with each interval of the period, if the price does not form a new maximum, this indicator decreases by the number equal:
A = ((N-H)/N)*100,
where N – means the whole period, and H – the number of days that have passed since the last maximum in the considered time period.
However, if at a certain moment the price forms a new maximum, the “Aroon Up” is equal to 100% again.
Trading on the main Aroon indicator signals
There are 3 types of Aroon indicator signals:
Signals of the first type show the extremes of the asset price. At the same time, the cyclogram lines are located in diametrically opposite window ranges and indicate a downward or upward trend in the market. A downward trend is considered such that the AroonUp line is below 30% and the AroonDown line is above 70%.
Accordingly, at an ascending trend indicators are opposite – the line “AroonUp” is above 70%, and the line “AroonDown” is below 30%. However, the crossing of the “AroonUp” line with 50% level is a signal that an uptrend in the market is experiencing problems and a trend reversal into a downtrend may occur.
The signal of the second type – parallel movement of lines – testifies to strengthening of the existing trend in the market.
The third type of signals is line intersection. It indicates the presence of long-term trends in the market. Such position arises either due to the rise of the “AroonDown” line or due to the decrease of the “AroonUp” line, which indicates an ascending or descending market trend.
In this case, if the blue line crosses the level 30 of the Aroon indicator from bottom to top, and the red line moves towards it (but already from top to bottom), then when crossing them you should open a trading position to buy the asset (the main rule – the indicator blue and red lines should be in the range between 30 and 70 levels).
It is necessary to exit the open trading position when the indicator blue line reaches the upper limit or when these levels are crossed again in the reverse order. In case of stable trend movement, a trading position can be held for quite a long time, and it is recommended to use the manual trailing stop tactics. In order to open trading positions for sale, a similar principle is used mirrorwise.
Advantages and disadvantages of the Aroon indicator
Among the virtues can be attributed:
- High reliability. According to statistics, Aroon indicator extremely rarely generates false signals about the market conditions.
- It allows to determine not only the strength and direction of the trend, but also shows the emerging possibility of trend reversal.
- Stable in operation, intuitive and easy to interpret graphical indicators that are being formed.
The disadvantages include:
- Delay in displaying positions at sharp price movements. This requires traders to continuously monitor and analyze the market using other technical analysis tools.
- According to statistical data, the profit from trading based on Aroon indicator signals exceeds the profit from trading based on the “buy and hold” strategy by 5.5%.