If you are struggling to find the strength of a trend, or can't figure out if the price
is in a range or not, the Aroon indicator is right for you. Trend is where most money
is made. So Aroon indicator can be very useful to determine whether a stock or Forex pair is
trending or is in a range. When Tushar Chande created this indicator in 1995, it was mostly
used to find the beginning of a new trend. Since then, traders have learnt to use it
in different ways, and have created many different strategies around it. In this video, you will
learn about the aroon indicator, how to use it to find more about a trend. Furthermore,
I have also tested one of the aroon trading strategy one hundred times, to find if the
Indicator works as an entry signal generator or not.
So if you want to know if the aroon strategy is a profitable strategy, stick around, after
all you don't want to risk your money on an indicator that doesn't even work. And if you
are watching the Trading Rush channel for the first time, also check out other videos
on this channel, where we tested bunch of other indicators 100 times to find their real
win rates.
This is how the aroon indicator looks like. On trading View, this indicator will come
with the default length of 14. If it is different for you on your charting platform, just remember
I have tested this indicator 100 times with these default settings.
As you can see, the aroon indicator will come with 2 lines. One will be the aroon up line.
And other one will be the aroon down line. Now, on trading View, these lines are orange
and blue in color. So to keep things less confusing, I have, and you should probably
change it to green and red color respectively.
On the right hand side of this indicator, you will see some values ranging from 0 to
100 percent. These are the values that we are going to use to find the strength of a
trend.
Here's how most traders use the Aroon indicator. It's a bullish trend, when the aroon up is
above 70, and aroon down is below 30. Similarly, it's a bearish trend, when aroon down is above
70, and aroon up is below 30.
Now one thing to note here is, the bullish and bearish signals are generated by looking
at the aroon line that is at the top. Some beginner traders get confused, and take short trades
when aroon down line is at the bottom. The bearish trend signal is only generated when
the aroon down line is above the 70 percent level.
Now one of the best part about the aroon indicator, is that it helps to identify the range market.
Most new traders lose money in a range market, so indicators like these really come in handy.
When the aroon up and aroon down lines are parallel to each other, the market is said
to be in a range. It means that there is no trend going on. And if you are a new trader,
you should probably avoid taking new positions. Other ways to identify the strength of a trend,
is to look at the two aroon lines. If aroon lines are far away from each other, there
is a strong trend going on. And if they are very close to each other, the price is probably
consolidating at the moment.
Now like I said, the Aroon indicator is really good when it comes to identifying the trending
and ranging market, especially for a beginner. But just like other indicators, people have
found new ways to use this indicator, as an entry signal generator.
In this video, I have tested this 100 times, using one of the popular aroon trading strategy.
Here's how the strategy goes.
The buy entry signal is generated, when the aroon up is touching the 100 percent mark,
and aroon down is at 0 percent. Similarly, the sell signal is generated, when the aroon
down is at 100, and aroon up is touching the 0 percent mark.
Some people also use 70 and 30 levels to buy and sell, but those levels generate a lot
of false signals. So i have used 100 and 0 levels to backtest, instead of 70 and 30.
But if you have been watching the Trading Rush channel for a while, you can tell, that
this setup on its own can't make money, because there is no way to identify the direction
of the long term trend. If you trade on a smaller timeframe, you should always pay attention
to the trend direction of the higher timeframe. Otherwise you will take trades in the opposite
direction of the long term trend.
The easiest way to identify the long term trend direction, is to use the 200 period
moving average. If price is above it. It's an up trend. If price is below it, it's a
down trend.
So here's how the complete modified aroon strategy goes.
We will only buy, when the aroon up is at 100, and aroon down is at 0, and the signal
is generated when the price is above the 200 period moving average.
And we will only sell, when the aroon down is at 100, and aroon up is at 0, and price
is below the 200 period moving average.
Since aroon indicator doesn't give information about setting the stoploss, I have used the
parabolic sar indicator to set the stoploss while testing the aroon indicator 100 times.
Parabolic sar is an excellent indicator. If you have never heard about it, check out the
parabolic sar video on the Trading Rush channel. And i have also tested that indicator 100
times to find its real win rate. You can find that video on the Official Trading Rush Website.
So, I tested aroon trading strategy one hundred times, here's what happened. You can slow
the backtesting clip, if you want to see each trade carefully.
I'm using the official trading rush app for backtesting. You can use it while testing
your strategy as well. It will help you keep track of your trades, and will calculate
everything in just one click. You can find it on the Play Store, or you can use the link
in the description.
While the backtesting clip is running, here are some important points, advantages and
disadvantages I found about the aroon indicator, while testing it 100 times.
Number 1. When the aroon lines were separated and were far away from each other, the trend
that was going on was strong. Most of the time, there was no consolidation when the
aroon indicator was indicating a trend. When price was in a range, the aroon lines were
not on the opposite end of the Indicator. They were intersecting multiple times in a
short time period. What this means is, the aroon indicator works great if you only use
it to determine the strength of a trend, and to find if the market is ranging or not.
Number 2. The aroon indicator, worked great as an entry signal generator. Some trades
I found were at a start of a new trend, or right at the correct end of a pull back. But
there is one problem with aroon indicator that kept turning the profit into a loss.
Number 3. The biggest drawback of this Aroon Setup, is that the aroon indicator doesn't
know when the trend is coming to an end, or is stretched out too much. And it's okay,
because aroon is made to find the start of a new trend, and not the end. Most of the
trades I lost while testing it 100 times, where at the end of the trend, where there
were other signals of reversals. This could be easily avoided. To avoid taking trades
at the end of a trend, you can use other indicators that do that job perfectly. I have made videos
on these types of indicators on this Trading Rush channel. Check it out if you want. The
best part about the MACD indicator video was one of them.
So, after testing the aroon indicator as an entry signal generator, here's what I found.
The win rate of aroon indicator is approximately 40 percent. Since I tested other indicators
with 1.5 to 1 reward risk ratio, on 30 mins, and on Euro JPY pair, I have used the same
criteria to test this Indicator as well. There were many other indicator that performed way better,
than what the aroon indicator performed here.
This strategy is a hit or miss strategy. In this backtest, the Aroon indicator didn't
lose money, but didn't make money either. The maximum number of winners I got in a row
were 4, and maximum number of losses in a row were 9. At one point, this strategy did
make 1350 dollars. But then everything went downhill, and the 1350 disappeared as i took
more trades.
If you are thinking about trading using the Aroon indicator, remember, Aroon is good when
it comes to identifying the strength of a trend, or to determine of the market is in
a range or not. When it comes to taking trades only based on entry signals given by the
aroon indicator, you are better off with some other indicator.
I have tested many other indicators 100 times of this channel, some of them had excellent
win rates. If you want, you can watch them in the Trading Rush App, or on the Trading
Rush Website, and some of them are still here on this Trading Rush channel.
That's all. Like the video if you liked it. Subscribe if you want to see more trading
strategies tested multiple times to find their real win rate. Thanks to all the wonderful
people who support Trading Rush on Patreon, you make these videos possible, and I really
appreciate it. And thanks to everyone for watching.