One thing about trading with the trend is being able to define whether it is trending upwards, downwards, or simply not at all.
That is great for defining it, but hardly any traders actually know the difference between a trend and a range, which ushers in some really undependable trades and losses.
Platform
The Aroon Oscillator is one of the most potent tools for identifying market trends in a very effective manner.
It helps traders to decide if the market is currently facing an uptrend, a downtrend, or simply ranging by comparing its performance over two time periods.
Solution
By mastering the Aroon Oscillator, one will be able to avoid fake signals, not trade on unfavorable conditions, and merge their trading strategies with the trend.
What is an Aroon Oscillator?
The Aroon Oscillator has two lines:
Aroon Up Line (Orange)
This reflects the strength of uptrends through the frequency of new highs within the indicator’s length window.
Aroon Down Line (Blue)
This measures the frequency of new lows within the length window and gives a true indication of the strength of the downtrend.
How does it work?
The indicator assesses the price action in the market and compares new highs versus new lows. Key takeaways are:
- Aroon Line at 100: When a recent high or low is in the length window.
- Aroon Line at 0: This means there have been no new highs or lows in the length window, and therefore, no trend.
- Distance Between Lines: The wider apart, the stronger the trend, while parallel movement denotes range conditions.
How to Trade Using the Aroon Oscillator
1. Identifying Trends
- Uptrend: The Aroon Up Line stays close to 100, while the Aroon Down Line remains closer to 0.
- Downtrend: Aroon Up Line stays at zero line, while Aroon Down Line hovers in front of 100.
- No Trend-Ranging: Both lines move parallel and close with no trend.
2. Avoiding Ranging Markets
Avoid taking any trades based solely on the trend indicator during ranging conditions.
Instead, watch for both lines moving closer to each other, with bounces between 100 and lower levels.
3. Using Additional Tools
Combine the Aroon Oscillator with other indicators, which provide more sophisticated entry and exit signals.
This can involve the Stochastic RSI:
- Aroon Oscillator Longer Length: This screens for long-term trends.
- Stochastic RSI-Shorter Length: The plot of overbought or oversold conditions with pinpoint accuracy for trade timing.
Best Settings for the Aroon Oscillator
The only setting available for adjustment is that of the length window, which basically dictates how far the indicator will look back in the chart to analyze highs and lows.
Suggested Settings
- Default Length (14): Appropriate for shorter-term trades.
- Longer Length (200): Perfect to capture long-term trends.
Pro Tip: Length increases will tend to catch large, smooth market trends and filter the noise out.
Experimenting with different settings will tend to be based on your actual trading timeframe and the markets’ behavior.
Enhanced Visualization
To make it more user-friendly, the modified Aroon Oscillator can:
Change Line Colors
- Up > Aroon Down: Green for uptrend.
- Red for downtrends: Aroon Down > Aroon Up.
Background Shading
- Bright White: Strong trending conditions.
- Dark Grey: Trending or consolidating markets.
These features put a clear view on the market conditions for the trader to decide whether to trade or wait.
Why use the Aroon Oscillator?
Trend Strength Detector
This helps to confirm strong trends and avoid fake signals.
Prevents Losses in Ranging Markets
It effectively underlines consolidation periods for a trader to avoid forming poor trade setups.
Adaptive Across Markets
Works for stocks, forex, crypto, and other assets.
Tips for Successful Use
- Combine with Other Indicators: Combine with momentum oscillators like Stochastic RSI for better precision.
- Adjust Settings Regularly: Try different lengths to match your trading strategy.
- Confirm Before Trading: This is the strategy that makes sure the trends are strong enough; one will notice the distance between the Aroon lines.
Final Thoughts
The Aroon Oscillator is a great tool for the trend trader.
If you can understand its mechanics and apply it in your trading strategy, then you can detect the market trends, avoid ranging conditions, and thereby enhance trading success.
Try the free version of the modified Aroon Oscillator on TradingView, or upgrade for unlimited access to more advanced tools.
Subscribe to our channel for more on how to do this trade. Also, for more trading strategies and premium indicators, check out Quantifica on Patreon.