Here's how to use the Aroon Indicator to determine trend for a stock

Avdhut Bagkar | Business Standard
10th July

Aroon Indicator helps identify change in market trend. Developed by Tushar Chande in 1995, it measures time taken for the price to climb a new high and low to determine trend change. In simple words, the Indicator is used to identify trend changes in the price of an asset, as well as the strength of that trend. In essence, the Indicator measures the time between highs and the time between lows over a period. In a bullish sentiment, the price needs to scale fresh / successive highs in a short span of time.

Besides identifying the trend change, this Indicator also helps one gauge the strength of a trend, with the help of two lines: 'Aroon Up' assesses the uptrend and 'Aroon down' the downtrend. The crossover of these two lines facilitates the major shift in a trend: if “Aroon Up” crosses the ‘Aroon down’ upward, then it is called as a beginning of an uptrend and vice versa.

The 'Aroon Up' measures the number of periods since the high and 'Aroon Down' measures the number of periods from lows. Generally, the 25-day period is considered to determine the recent high-low levels. The Indicator is measured on 0-100 scale and whenever the value crosses the 50-mark, the indicator is said to have seen high / low in the last 13 days.

How to interpret the 'Aroon Indicator'?

Whenever the value of 'Aroon Up' is lower on the scale, the trend is said to be weak, especially if “Aroon Down” starts exhibiting signs of reversal.

Whenever the 'Aroon Up' shows sideways movement, the price is expected to show mild-to-severe correction, but it helps to identify the upcoming change.

When both the lines run in the same direction, the trend is likely to be strong and firm.

Crossover indicates a major shift in a trend.

One can use Aroon Indicator to discover trailing stop loss.

Things one should keep in mind while using the Aroon Indicator

Whenever a stock price makes a sudden large swing, the “Aroon Up” will accordingly respond. However, this may result in a false signal till price shows signs of stability. A gradual rise in an Aroon Indicator provides more accurate measurement of a change in trend. At times, this Indicator may act as a tool to identify a change in a trend, and not as a trading signal.

This Indicator assists highly in identifying a shift in a trend, although the same needs to be further validated by price patterns and structures before one enters into a buy or sell trade. The Aroon Indicator performs well when combined with other indicators, as the former can provide information regarding a shift in a trend, while the latter may deliver signal to buy and sell.

Limitations

The Aroon Indicator has its limitations. The Indicator may, at times, signal a good entry or exit, but can also provide poor or false signals. The buy or sell signal may occur too late, after a substantial price move has already occurred. This happens because the indicator is looking backwards, and isn't predictive in nature.

Disclaimer: This information is from a third party—Business Standard—offered through a tie-up to Kotak Securities customers. Click here for complete disclaimer.

The analysis has been done by a Business Standard reporter who is a certified technical analyst. The analysis does not represent the views of Kotak Securities.

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