The Aroon Indicator is a technical indicator that is used to measure the strength of a trend and the likelihood of a trend change. It was developed by Tushar Chande in the 1990s and consists of two lines, the Aroon Up line and the Aroon Down line.
The Aroon Up line measures the number of periods since the highest high occurred, while the Aroon Down line measures the number of periods since the lowest low occurred. A reading of 100 on the Aroon Up line suggests that the security has made a new high in the past period, while a reading of 0 suggests that the security has not made a new high in the past period. A reading of 100 on the Aroon Down line suggests that the security has made a new low in the past period, while a reading of 0 suggests that the security has not made a new low in the past period.
The Aroon Indicator can be used in several ways to generate trading signals. One of the most common ways is to look for crossovers of the Aroon Up and Aroon Down lines. When the Aroon Up line crosses above the Aroon Down line, it generates a buy signal, and when the Aroon Down line crosses above the Aroon Up line, it generates a sell signal.
Another way to use the Aroon Indicator is to look for divergences between the Aroon Up and Aroon Down lines and price action. When the Aroon Up line is making new highs while price is failing to do so, it can be a bearish divergence and a warning of a potential trend reversal. Similarly, when the Aroon Down line is making new lows while price is failing to do so, it can be a bullish divergence and a warning of a potential trend reversal.
It's important to note that the Aroon Indicator is a trend-strength indicator and it's a lagging indicator, which means that it is based on past price data and may not always provide accurate predictions about future price movements. As with any indicator, it is best to use the Aroon Indicator in conjunction with other indicators and analysis techniques to confirm signals and get a better understanding of the market conditions.
Keep in mind that the Aroon Indicator is used to measure the strength of a trend and the likelihood of a trend change, it's composed of two lines, Aroon Up line and Aroon Down line, and it's important to use it in conjunction with other indicators and analysis techniques to get a better understanding of the market conditions.