Greetings traders and welcome back.
Thank you for joining me again
as we dive into another In-Depth with Chris episode.
Today's subject will be the Aroon indicator.
It's a fun word to say, but it's even more fun to use.
It's a technical analysis based indicator that lets us know
when we are witnessing a strong uptrend or strong downtrend,
and can even indicate potential reversals in the market.
It has a lot of value and it's worth being aware of, or
at least adding it to our trading
arsenal. Before we go any further, let's show you how
you can apply the indicator to your charts, and then we'll
come back to it a little bit later on to show you some of
the settings that are involved with it.
To get to it, we're going to go to the "show indicators"
options button here in the top center.
We're going to add a new section like we know how to do in the bottom right,
and after we have our section two, we're going to click "Aroon",
which is right near the top because starts with an "A", and
then we are good to go. We'll close on out of that.
I'll adjust it down just a little bit lower and we're all set.
Without further ado, let's dive on into it.
As we mentioned, the Aroon indicator is a technical analysis
indicator, which means it could be very beneficial to you
if you are planning on passing the Gauntlet Mini. Tushar Chande
invented it in 1995, and it literally means "dawn" in Sanskrit.
It essentially looks to detect the beginning of a trend or
a change in the trend, as is captured by the name.
The indicator itself consists of two lines.
We have an Aroon up line, and we have an Aroon down line.
The up line is determining the number of periods away
we are from a high in the corresponding 14 period time frame.
When we say "14 period", that's because the default setting
is to 14 periods, as you'll see on most platforms. The down line
measures the number of periods we are away from a low.
In short, the up line and the down line give us an idea of
how long it's been since the last high or the last low of significance.
When we take a look at the Aroon indicator on the chart,
it's relatively simple to look at, so it makes it a lot easier
to analyze than some of the other, more busy indicators out
there. It's just two lines that seem to cross back and forth
over each other, changing from an extreme of 100 to 0 on the
bottom of a graph. What these lines are doing is, they're
displaying a 14 period measurement, giving us an idea of when
the last high and low was in relation to each other.
With the blue line, we have an Aroon up line.
Now, the colors are going to be specific to whatever platform
you're using and to whatever you set them to yourself. In this case,
the blue line does represent my Aroon up line, but the orange
line is going to represent my Aroon down line, and these little
white circles are going to represent my poor attempt to draw
a circle, and what we have here
is, once again, a visual display of how long it's been since
the market has set a new high or a new low.
This gives us an idea by looking at this section alone,
whether the market is trending strongly, or whether it is
not trending strongly, or perhaps whether it's changing hands
when these lines are crossing.
As we mentioned, the Aroon is measuring how long it's been
since the last high or low for the current period being analyzed.
The up and down values are expressed in percentages,
like we discussed, where it's going to range from 100 at the
top end to 0 at the bottom end.
As the Aroon up line works its way to the top end, that would
be a strong bullish indication, especially when it's coupled
with the Aroon down line being down near the 0%.
Our strongest bullish scenario is going to be when we have
Aroon up line near 100%, and we have an Aroon down line at
the same time down near 0%. That indicates strong
bullish momentum without much bearish momentum, more or less. If
we were to inverse this scenario, and we wanted to look at a strong bearish trend,
well then we would want the Aroon up line to be down near
0%, while the Aroon down line is then up near 100%.
The equation for how these lines are calculated is
relatively simple and has been laid out here for you guys.
For the Arun up line, it's going to be equal to parentheses
20 minus the number of days since the 20-day High, representing
the period being analyzed.
This is a lot of words that makes the equation look a lot harder than it is,
but really, this whole thing is just one thing, and you'll
see here when we give you an example in just a moment.
Then after this, it is going to be 100 multiple, or I'm
sorry 100 divided by 20, as you can see here on the end.
The Aroon down line is going to be 20 minus the number of days since
the 20-day Low instead of the High like we had up here, and
then we're going to do the same thing at the end where we
have multiplied by 100 over 20.
If we wanted to calculate the Aroon up value for today
and we were analyzing the last 20 days,
we need to determine the time when price was the highest.
If that was two days ago for example, then our equation would look like this. We would
have Aroon up, and it would then be the 20 minus 2 because
it had been 2 days ago, and that would be the end of the
parentheses, and we don't need to worry about any more of
this, and we would just accelerate ourselves to the end.
We're outside the parentheses.
We have 100 over 20. Relatively simple, so it is not the
most difficult math in the world.
Once again, it is a beautiful thing because the indicator
is going to be doing this for us.
This is just to understand where it's coming from.
Using the Aroon is relatively simple and can be broken down
into two main categories, with a third tidbit of information
that it kind of provides as well.
The first category is going to be just paying attention to
the crosses that the Aroon is providing us.
That means, if we look at something like right here on the
chart where the Aroon up line in this case, which is our blue
line on this image, our blue line crossed above our orange
line. You see how the orange line was actually up, which is our down line,
it was above the blue, then came down, crossed below as the Aroon
up line crossed above it, working its way higher.
Basically, they just changed hands. The lines crossed over
themselves. Well, if the blue line, which is the up line, if
the up line is crossing above the down line, that in and of
itself is a bullish trigger. The lower the down line goes,
the less resistance we can think that the market is going
to have to our bullish move, and the higher the up line goes,
the more power our bullish move has. When we look at this
cross, if we follow it directly up, we can see that during this period in the market,
we began a powerful bullish run. We had a nice bullish activity here,
we have nice bullish activity after the cross occurred, and
this is just the simple concept behind paying attention to the Aroon lines.
Obviously, we'd like to use price action in conjunction with
this, but this can provide very easy ideas as to where we
may be interested in buying or selling in the market. If we
were to be selling in the market, then we just want to see it happen the other
way around, like we had happened here.
We had the Aroon down line and the Aroon up line cross again,
but this time, the Aroon up line is going below the Aroon down line,
and the Aroon down line is going well up here to the 100% mark,
indicating a strong bearish trend with little fight at this
point from the buyers as the Aroon up line reaches 0.
If we follow this up, we can see that we had a very powerful
bearish move after this bearish cross.
There is a third tidbit of information
like I mentioned, that can be pulled from the Aroon, and that
is maybe times when we probably shouldn't be trading.
That is when these lines run parallel to each other like we had happen here.
This is a case when they're not intersecting, but they're
both falling. When both of the lines are falling and they're
running parallel to each other,
this usually is occurring in a time where the market is in
a consolidation phase, and not a lot is happening for one direction or the other.
As a trader, what we want ideally is the market to move,
whether it's in one direction or the other, we need that movement,
so we usually don't prefer times when the market goes straight sideways.
There are three main advantages that you could
take away from using the Aroon. The fact that it's easy to
comprehend is a big one. If we understand what we are doing,
chances are we're going to find a higher degree of success
with it and a lower degree of incorrect mistakes along the
way. We won't have as many blunders if we know what we're
doing. Number two is going to be that it effectively signals change in trends.
This has been the general consensus of the trading community
for some time, and it's why the Aroon has stayed in the default
indicator package of many trading platforms out there.
It is a very powerful indicator that is well respected.
Number three is the flexibility in choosing the interval.
This means that we can change it from the default setting of 14, to whatever we want.
It's actually very common to see traders switch it to a 20 or 25 period
as well. I strongly recommend getting to know the indicator
and using it a little bit before you start changing the settings
around, but the ability is there and that is definitely an
advantage. That means we can adjust it as we see fit for the
conditions that were currently analyzing.
As far as some potential limitations that might be associated with the indicator,
we have the fact that it is a lagging indicator.
This means that it is behind current price, and as such, we
could be getting into price a little bit delayed and missing
out on a perfect entry, due to this lagging nature. Number
two for a potential limitation is that it's influenced more
by time than price movements.
It's influenced more by time than price movements because
it depends only how long ago that last high or low was witnessed.
The indicator does not provide any information on the magnitude
of that particular change. Then we have number three, which
is, it should be used in conjunction with other indicators,
and this one is just kind of a common sense one as well.
We want to make sure that we're always double-checking ourself.
We don't want to just get in blindly with one source of information,
regardless of where that source of information is coming
from, and this does apply to the Aroon as well.
Now for some frequently asked questions to save you some
of the Googleing that you may come to as you develop these
questions. The first one is: Does the Aroon indicator work?,
which is the most commonly asked question about the Aroon
indicator of all because people want to know if it's worth
their time. The short answer is yes. It's considered to be
a reliable indicator in regards to tracking price trends
of whatever asset it is that we are measuring. It may not catch
the trend immediately, but overall, the results do to be pretty darn reliable.
Number two is: How accurate is it? This kind of ties
into number one to a degree, but it's going to be dependent
on the trader interpreting the information
of course. The overall information is relatively easy to
interpret, so I would say that overall it is beginner-friendly,
but the degree of accuracy found is going to be important
with how we couple the information we're receiving from the
indicator with outside information to help confirm that we
are getting a good read. That means using price action
or something like the Aroon oscillator, which is an extension
of the Aroon indicator, can help us keep that accuracy level as high as possible.
Number three is going to be: What does the Aroon indicator
measure? Well, the Aroon indicator measures how recently there
was a high or low, depending on whatever time frame that we
choose. The Aroon lines can be used to determine if there's
an active trend, or whether we're just seeing potential reversal
in the trend. These lines can also signal to us whether there
is a price consolidation taking place if we see those lines
run parallel to each other while they drop, like we talked
about. Then number four is: Can it be used with other forms
of analysis? The answer is absolutely yes, and we strongly
encourage that you do this. Other forms of analysis can always
be used to help filter and add external layers of confirmation
to whatever it is that we're trading with.
This, in my opinion, is always a good thing. We don't
want to add so much so that we kind of cluster up our charts
and actually miss out on a lot of information, or provide
ourself a situational requirement that is just so difficult
to reach we never get any trades, but adding another form
of analysis to the Aroon, like the Aroon oscillator, is always a great idea.
As promised, let's take a look at how to navigate to the settings of the
Aroon indicator, that way if you're not a fan of the orange
or blue lines that are default on the Finamark platform,
you can change them for yourself
as well, or perhaps even change the period from the default
14 period portion that the Aroon is measuring.
If we want to do that, we're going to assume that the
indicator's already applied because we showed you how to do
that at the beginning of the video.
We're just going to make sure that we have the Aroon highlighted over here
Once we have the Aroon highlighted, we need to come over here
to where this cogwheel is. When we click on the cogwheel,
it's going to open up the settings tab, which doesn't have a whole lot going on.
There's really not a whole lot
we have the ability to change because the Aroon is relatively
simple. We have a period option where we can change it from
the default 14 period if we so choose, and then we have the
Aroon up which is currently set to blue.
I can shift this to any color on the color spectrum, or the
Aroon down line, same thing.
If I don't like this orangey-peach color I can change that as well.
I'm not going to do any of that today, so I'm going to go ahead and close out,
but after you change any of this, make sure you hit this blue
save button. Overall, in conclusion, the Aroon is something
that can definitely help in the passing of the Gauntlet Mini because it can help
identify those strong trends, letting us know when there's not a whole
lot of bearish pressure during a strong
bullish trend. I strongly recommend you check it out, or
play around with it to see if it's right for you.
Thank you for joining me again as always folks, until next time
please make sure you smash that like and subscribe button for me
because it helps me out a great deal so I would appreciate it.
I will see you all soon. Happy trading everybody, over and out.