The Aroon indicator is a technical analysis tool that can be used in the forex market to determine the strength of a trend and potential reversal points. It was developed by Tushar Chande in 1995 and is based on the idea that the strongest trends occur when both the upward and downward momentum are strong.
The Aroon indicator consists of two lines – the Aroon up and the Aroon down. The Aroon up measures the number of periods since the highest high, while the Aroon down measures the number of periods since the lowest low. The Aroon up is typically plotted in green, while the Aroon down is plotted in red.
To use the Aroon indicator in forex trading, follow these steps:
Step 1: Choose a time frame
Select a time frame that suits your trading strategy. The Aroon indicator can be used on any time frame, but it is recommended to use it on a longer time frame, such as the daily or weekly chart, to filter out noise and false signals.
Step 2: Add the Aroon indicator to your chart
Once you have selected your time frame, add the Aroon indicator to your chart. Most forex trading platforms have the Aroon indicator as a built-in tool, but if your platform does not have it, you can download it as a custom indicator.
Step 3: Interpret the Aroon indicator
The Aroon indicator consists of two lines – the Aroon up and the Aroon down. When the Aroon up is above the Aroon down, it indicates that the trend is up. Conversely, when the Aroon down is above the Aroon up, it indicates that the trend is down.
The Aroon indicator can also be used to identify potential trend reversals. When the Aroon up and the Aroon down are both below 50, it indicates that the market is in a consolidation phase and there is no clear trend. However, when the Aroon up crosses above the Aroon down, it indicates that the trend is turning bullish, and when the Aroon down crosses above the Aroon up, it indicates that the trend is turning bearish.
Step 4: Use the Aroon indicator in conjunction with other technical indicators
While the Aroon indicator can be used on its own, it is recommended to use it in conjunction with other technical indicators to confirm trading signals. For example, you can use the Aroon indicator with the moving average to confirm the direction of the trend. If the Aroon up is above the Aroon down and the price is above the moving average, it indicates a strong bullish trend. Conversely, if the Aroon down is above the Aroon up and the price is below the moving average, it indicates a strong bearish trend.
Step 5: Set stop loss and take profit levels
When trading with the Aroon indicator, it is important to set stop loss and take profit levels to manage risk. You can use the Aroon indicator to set these levels by placing the stop loss below the previous low for a buy trade and above the previous high for a sell trade. The take profit level can be set at a fixed ratio to the stop loss, such as 2:1 or 3:1, or based on a key level of support or resistance.
In conclusion, the Aroon indicator is a useful tool for forex traders to determine the strength of a trend and potential reversal points. It can be used on its own or in conjunction with other technical indicators to confirm trading signals. By following the steps outlined above, traders can effectively use the Aroon indicator in their trading strategy.
