Introduction to the Aroon Up and Down Indicator
Price movements are often the key factor for identifying trends. However, time could also be another factor that could effectively be used to identify trends.
The Aroon Up and Down Indicator is an example of such time based trend following indicator.
What is the Aroon Up and Down Indicator?
The Aroon Up and Down Indicator, otherwise known as the Aroon Indicator, is a trend following technical indicator. However, unlike most trend following indicators which bases its trend on price movements, the Aroon Up and Down Indicator places more emphasis on the number of periods between each new high or low. This is based on the concept that uptrend markets would constantly produce new highs and downtrend markets would constantly produce new lows.
How the Aroon Up and Down Indicator Works?
The Aroon Up and Down Indicator computes for two indications – the Aroon Up line and the Aroon Down line.
The Aroon Up formula computes for difference between 25 and the number of periods since the last 25 period high. It then divides the difference by 25 and then multiplies it by 100. In essence, it is a percentage of time it takes before a new high is reached. The Aroon Down formula on the other hand is almost exactly the same except that it measures for the lows instead of the highs.
These two formulas would then plot two lines representing the Aroon Up and Aroon Down lines.
This version of the Aroon Up and Down indicator however is preset at 14 periods rather than the standard 25. This creates a more responsive trend following indicator.
The blue line represents the Aroon Up line, while the red line represents the Aroon Down line.
The number of Aroon Periods can also be modified under the Inputs tab of the indicator settings.
How to use the Aroon Up and Down Indicator for MT5
Trend direction using the Aroon Up and Down indicator is based on how the Aroon Up and Aroon Down lines interact. The market is in an uptrend if the Aroon Up line (blue line) is above the Aroon Down line (red line). Inversely, the market is in a downtrend if the Aroon Down line is above the Aroon Up line.
The trend reversal signals the Aroon Up and Down indicator can often result in a significant trend reversal. However, these signals should be in confluence with other trend reversal setups in order to be more accurate.
Buy Trade Setup
When to Enter?
Identify a downtrend market with a diagonal resistance line. Open a buy order on the confluence of a break above the resistance line and the crossing over of the Aroon Up line above the Aroon Down line. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as the Aroon Up line crosses below the Aroon Down line.
Sell Trade Setup
When to Enter?
Identify an uptrend market with a diagonal support line. Open a sell order on the confluence of a break below the support line and the crossing over of the Aroon Up line below the Aroon Down line. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as the Aroon Up line crosses above the Aroon Down line.
Conclusion
The trend reversal signals produced by the Aroon Up and Down indicator can be very responsive and could also result in a significant trend reversal. However, this indicator should be used in confluence with other trend reversal signals.
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