Currency traders often find it difficult to deal with trends. While currency prices follow a particular trend most of the time, sometimes it follows sideways action. Often this calls for the need of an oscillator since it’s easier to detect fluctuating values of prices between upper and lower boundaries. Aroon Forex indicator simultaneously measures upward and downward direction referring to overbought or oversold conditions. Introduced in 1995, it helps traders understand the long term trend.
This indicator takes into account two facets of trading currencies – bullish and bearish. Sometimes experts recommend combining the two into a single oscillator. Find the difference between bullish and bearish indicator values.
Calculating Aroon indicator:
Traders normally use MetaTrader for calculating Aroon indicator formula. To do that, they undertake 3 steps. Selecting a particular period ‘n’ (default value of which is 14), they calculate the AroonUp and AroonDown indicators. This enables them to take into commiseration the bullish and bearish price trends.
Most of the computational work is done via dedicated indicator platform in your trading platform. AroonUp value is 100*((n – periods since highest high)/n) while AroonDown is 100*((n – periods since lowest low)/n). In the diagram, AroonUp is represented by blue line while red line denotes AroonDown.
Understanding Aroon indicator values:
Being a leading indicator, Aroon Forex indicator helps traders in foretelling that a trend is looming. Although the timing is not an important factor, it definitely aids in showcasing the weakness of the indicator. Whether long trend is happening or is just a possibility depends on Aroon indicator values.
Interpreting the Aroon indicator values is a piece of cake, experts opine. Its value oscillates between 0 and 100. That depends on the relative value of AroonUp and AroonDown indicators. Traders deduce it in 3 ways
• AroonUp or AroonDown values will cross each other and change sides if the market suddenly changes from a bullish to a bearish market. Thus it is heavily dependent on sudden market changes. Respective values oscillate down to a point till reversals occur.
• Expect extreme readings of Aroon Forex values in case market is trending up or down with strength. This generally occurs when sudden abrupt market forces hit the market. It also causes its values to experience sharp rise/fall.
• In case of normal or un-reacting market conditions, the Up and Down Aroon lines stay parallel to each. This implies that oscillation generally occurs in case markets fluctuate with considerable effect on prices.
Why is Aroon indicator essential?
Determining the directional price movement with Aroon indicator is easier. Thus a potential bearish movement is detected when Aroon Down crosses Aroon up from below and vice versa. Decision to buy or sell however should depend on underlying factors like price breakout or new positioning of trend line. In most of the cases, Aroon indicator itself signals traders.
Old-timers always recommend using Aroon Forex in case finding trends interest you. When prices fluctuate with immense random movements; that becomes a necessity. The visual representation aids further to your cause and eases your choice of decisions to behave as prices react.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.