Wednesday, February 20, 2008


Here's one way to help resolve the question of whether a stock is trending or oscillating.
Some comments on the AROON by Worden Bros. (TC2007):
The Aroon indicator was created by Tushar Chande in 1995. The Aroon Up line measures the strength of the uptrend by measuring the number of periods that have passed since prices reached the highest high in Period + 1 points on the chart. The Aroon Down line measures the strength of the downtrend by measuring the number of periods that have passed since prices reached the lowest low in Period + 1 points on the chart.
“The main assumption underlying this indicator is that a stock’s price will close at record highs in an uptrend, and record lows in a downtrend.” -
“Chande states that when Aroon(up) and Aroon(down) are moving lower in close proximity, it signals that a consolidation phase is under way and no strong trend is evident. When Aroon(up) dips below 50, it indicates that the current trend has lost its upward momentum. Similarly, when Aroon(down) dips below 50, the current downtrend has lost its momentum. Values above 70 indicate a strong trend in the same direction as the Aroon (up or down) is under way.” -
“…when a stock's closing price is equal to the highest price over the given period, the Aroon up will have a value of 100, which indicates that the time it has taken for the stock to reach its highest price has elapsed 100%, indicating a strong uptrend. In addition to extreme values, transaction decisions can be based on instances when the two lines cross. For example, when the Aroon up crosses up through the Aroon down, the stock is said to be in a new uptrend and should experience some upward momentum.” –
“The Aroon Oscillator signals an upward trend is underway when it is above zero and a downward trend is underway when it falls below zero. The farther away the oscillator is from the zero line, the stronger the trend.” - Investor/RT
“…the age-old problem for many trading systems is their inability to determine if a trending or trading range market is at hand. Trend-following indicators such as MACD and moving averages, tend to be whipsawed as markets enter a non-trending congestion phase. On the other hand, overbought/oversold oscillators (which work well during trading range markets) tend to overreact to price pull-backs during trending markets—thereby closing a position prematurely. The Aroon indicator attempts to remedy this by helping you determine when trend-following or overbought/oversold indicators are likely to succeed.” -
The Aroon is available on StockCharts and Ninja Trader plus a slew of FX platforms(I don't do FX). It's probably available on other platforms (not on Schwab). Seems to work best on the indices and the big caps. I like an 18 setting for the Qs. Adjust accordingly for other stocks/ETFs depending on cycle length.


Bill Luby said...

Good stuff, Bob.

Personally, I am a big fan of the Aroon and the Aroon oscillator. For some reason, I find it easier to use the oscillator (only one line, the net of the up and down lines) than the two lines that seem to be constantly zig zagging up and down at each other -- although the zig zag lines make for a good secondary reference.

I've never warmed up to the ADX like I have to the Aroon, but ultimately it's probably just a matter of personal preference.

Thanks for yet another good post,


bzbtrader said...

Thanks for the comment. The reason I pefer the Aroon as opposed to the single line oscillator is that thee crossovers provide clear entry signals and/or stops and being an old guy I need all the help I can get.