One of the basic steps in pre-trading prior to making an entry or exit position is determining the strength of a certain stock which includes deciding to whether where the direction of the price is headed and its strength. It is a type of a technical indicator designed to focus on the beginning of a trend and measure its strength.
Looking for the price or trend direction could get pretty difficult especially when opening and closing prices in a particular trend could get too close to each other and can be confusing as to if the price of the stock is really a buy or a sell.
Identifying Trend Strengths with the Aroon Up and Down
An easy way to start with understanding the Aroon Indicator is to familiarize oneself with the basics of its components which are composed of the following: Aroon Up, Aroon Down, and the Aroon Oscillator. These three lines would help one determine how strong a particular trend is and anticipate an upcoming reversal.
The Aroon Up and Down which are composed of two lines can be measured in a range of 0 to 100 similar to other technical indicators. It also uses the green and red line to show an upward or a downward trend. The current position of these lines will show the strength of a current trend which will help a trader determine and decide the market preference for the stock.
The two indicators basically show the weakness and the strength of an upward or downward trend and signal the likelihood of a sudden reversal in the stock’s position or the current trend.
To better understand the two indicators, the Aroon Up above the 70 level signals a strong upward trend while the Aroon Up below 50 signals an upcoming decline in an upward trend.
The Aroon Down positioned above the 70 level meanwhile, signals a strong downward trend while the Aroon Down below 50 signals that the downward trend shows a possibility of an upcoming rally.
The two indicators could also give other signals like to whether a certain trend is on a strong upward or downward trend aside from an upcoming rally or decline in the stock’s price or trend. The Aroon Down (red in the chart below) above the 70 level along with the Aroon Up (green in the chart below) beneath the 30 level shows a downward trend. While the Aroon Down below the 30 level and the Aroon Up above the 70 level shows an upward trend.
A crossover can also happen in trends where the two particular Aroon Up and Aroon Down cross each other. This can also signal an upcoming change in the direction of a trend or the price’s stock. In the chart below, the Aroon Up can be seen crossing over the Aroon down signaling an upcoming rally and an upward trend and vice versa.
However, traders should be aware that crossovers can be extremely vague and as every technical indicator goes, it is best to use others as well especially when a specific stock or security is in a period where it has yet to decide where the price direction will be headed.
False breakouts are also present when the two indicators go parallel, this is a sign for traders to hold a position or until the price shows a clear direction. One must also familiarize themselves with the conditions of the said indicator to avoid confusion and misinterpretation, especially during extreme trend positions. Observing the trend and the indicator is also a key especially if either of the two lines is almost touching the 100 level as this might mean an overbought or an oversold price. Keeping an eye on that will help a trader avoid huge losses since that will mean a reversal anytime soon.
Although the indicator over time and practice can give you clearer signals, it is best to use the Aroon Indicator along with a good and strong strategy that will give you a higher chance on positive risks such as profits and less loss incurred.