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  1. Accumulation / Distribution
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Aroon Oscillator

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The Aroon Oscillator measures the strength of a trend. It is constructed by subtracting Aroon Down from Aroon Up. The Aroon Oscillator oscillates between -100 and +100 with zero as the center line. It signals an uptrend if it is moving towards its upper limit and a downtrend when it is moving towards the lower limit. The closer the Aroon Oscillator value is to either extreme the stronger the trend is.

Developed by Tushar Chande in 1995, the Aroon is an indicator system that can be used to determine whether a stock is trending or not and how strong the trend is. "Aroon" means "Dawn's Early Light" in Sanskrit and Chande choose that name for this indicator since it is designed to reveal the beginning of a new trend.

The Aroon Oscillator is a single line that is defined as the difference between Aroon(up) and Aroon(down). All three take a single parameter which is the number of time periods to use in the calculation. Since Aroon(up) and Aroon(down) both oscillate between 0 and +100, the Aroon Oscillator ranges from -100 to +100 with zero serving as the crossover line.

Aroon(up) for a given time period is calculated by determining how much time (on a percentage basis) elapsed between the start of the time period and the point at which the highest closing price during that time period occurred. When the stock is setting new highs for the time period, Aroon(up) will be 100. If the stock has moved lower every day during the time period, Aroon(up) will be zero. Aroon(down) is calculated in just the opposite manner, looking for new lows instead of new highs.

Chande states that when Aroon(up) and Aroon(down) are moving lower in close proximity, it signals a consolidation phase is under way and no strong trend is evident. When Aroon(up) dips below 50, it indicates that the current trend has lost its upwards momentum. Similarly, when Aroon(down) dips below 50, the current downtrend has lost its momentum. Values above 70 indicate a strong trend in the same direction as the Aroon (up or down) is under way. Values below 30 indicate that a strong trend in the opposite direction is underway. The Aroon Oscillator signals an upward trend is underway when it is above zero and a downward trend is underway when it falls below zero. The farther away the oscillator is from the zero line, the stronger the trend.

Parameters:

  • Period (14) - the number of bars, or period, used to calculate the study.

Computation

Technically, the formula for Aroon(up) is:

[ [ (# of periods) - (# of periods since highest high during that time) ] / (# of periods) ] x 100

For example, consider plotting a 10-period Aroon(up) line on a daily chart. If the highest price for the past ten days occurred 6 days ago (4 days since the start of the time period), Aroon(up) for today would be equal to ((10-6)/10) x 100 = 40.

Aroon(down) is calculated in just the opposite manner, looking for new lows instead of new highs. When a new low is set, Aroon(down) is equal to +100. For each subsequent period that passes without another new low, Aroon(down) moves down by an amount equal to (1 / # of periods) x 100.

The formula for Aroon(down) is :

[ [ (# of periods) - (# of periods since lowest low during that time) ] / (# of periods) ] x 100

Continuing the example above, if the lowest price in that same ten-day period happened yesterday (i.e. on day 9), Aroon(down) for today would be 90.

Interpretation

Chande states that when Aroon(up) and Aroon(down) are moving lower in close proximity, it signals that a consolidation phase is under way and no strong trend is evident. When Aroon(up) dips below 50, it indicates that the current trend has lost its upward momentum. Similarly, when Aroon(down) dips below 50, the current downtrend has lost its momentum. Values above 70 indicate a strong trend in the same direction as the Aroon (up or down) is under way.

For the Aroon Oscillator, the positive value indicates an upward trend (or coming trend), and the negative value indicates a downward trend. The higher the absolute value of an oscillator, the stronger is an indication of a trend.

In some ways, Aroon is similar to Wilder's DMI system (and the Aroon Oscillator is similar to Wilder's ADX line). However, the Aroon is constructed in a completely different manner. Divergences between the two systems may be very instructive.


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