This is the third 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 the previous two articles, we have covered the background, the calculations involved, and how to use and read the Aroon Indicator. 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.
Forex traders focus on the Aroon Indicator key points of reference, which are highpoints, lowpoints, and simultaneous positionings. As with any technical indicator, an Aroon Indicator chart will never be 100% correct in the signals that it presents, but the signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding Aroon Indicator signals must be developed over time. In the example below, let’s develop a simple trading system based on Aroon Indicator signals and alerts.
The following trading system is for educational purposes only. Technical analysis takes previous pricing behavior and attempts to forecast future prices, but, as we have all heard before, past results are no guarantee of future performance. With that disclaimer in mind, the “White” circles and ovals on the above chart illustrate optimal entry and exit points for a trading strategy using Aroon Indicator analysis.
A simple short-selling trading system would then be:
- Determine your entry point after the “Blue” Aroon “Up” Indicator line reaches the upper extreme value and after the “Red” Aroon “Down” line enters the mid-region from an extreme;
- Execute a “Buy” order for no more than 2% to 3% of your account;
- Place a stop-loss order at 20 “pips” above your entry point;
- Determine your exit point after the “Red” Aroon “Down” Indicator line reaches the upper extreme value and after the “Blue” Aroon “Up” line enters the mid-region from an extreme.
Steps “2” and “3” represent prudent risk and money management principles that should be employed. This simple trading system would have yielded two profitable trades totaling 1,000 “pips”, but do remember that the past is no guarantee for the future. However, consistency is your objective, and hopefully, over time, Aroon Indicator Technical Analysis will provide you with an “edge”.
That concludes our series on the Aroon Indicator. For further reading visit our Forex indicators section.
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