This is the second article in our Aroon Indicator series. If you haven’t already we suggest that you check out the first article about the Aroon Indicator. In that article, we covered the background of the Aroon Indicator, how it is calculated, and how it looks on a chart. Traders use the Aroon “Up and Down” indicator lines to judge the strength of a trend, as absolute values signify strength, but simultaneous changes reflect a market that has yet to make up its mind.
The Aroon Indicator is classified as an “oscillator” since the values fluctuate between calculated upper and lower boundaries. The indicator chart typically has two lines, an “Up” version and a “Down” version, which simultaneously measure the momentum in either direction. When polar opposites occur, a peak or valley is the forecast, typical of overbought or oversold conditions.
How to Read an Aroon Indicator Chart
The Aroon Indicator oscillator with a setting of “14” is presented on the bottom portion of the above “Daily” chart for the “AUD/USD” currency pair. In the example above, the “Blue” line is the Aroon “Up” Indicator value, while the “Red” line represents the Aroon “Down” Indicator values. Aroon Indicator values at the extremes are worthy of attention.
The key points of reference are high points, low points, and simultaneous positionings. The “Aroon Indicator Rollercoaster” tends to be sensitive to peaks and valleys of future pricing behavior, but inconclusive during ranging periods. The Aroon oscillator also attempts to convey pricing momentum direction changes. Typical “oversold” and “overbought” conditions occur at extremes, and are generally confirmed when the opposite indicator line is traversing the mid-region at a similar moment in time.
The value of the indicator is in conveying if a trend is intact, but an inherent weakness is its tardiness of movement when sharp price changes take place.
As with any technical indicator, an Aroon Indicator chart will never be 100% correct. False signals can occur, but the positive signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding Aroon Indicator signals must be developed over time, and complementing the Aroon Indicator tool with another indicator is always recommended for further confirmation of potential trend changes.
In the next article on the Aroon Indicator, we will put all of this information together to illustrate a simple trading system using this Aroon oscillator.
Next Article >> Metatrader Aroon Indicator Settings >>
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