This indicator was created to identify the direction of price movement and trends in the market. The core of this indicator is to identify and display changes in market trends towards strengthening or weakening within a specific time interval.
Tushar S. Chande, the famous Indian trader, created the Aroon indicator. He also created many other useful technical analysis tools, including the Stochastic-RSI “hybrid” tool.
Chande was born in 1958 and is an American trader of Indian origin. He is best known for the research he did on technical analysis. This led to the creation of many new indicators, many of which are still widely used for trading. He has also written many scientific articles and books, and owns nine US patents, while also being a professional analyst and trader. He has also developed a number of trading systems, and indicators including Adaptive Stochastic Oscillator, Aroon and VIDYA. He also developed the Dynamic Momentum Index and Stoch-RSI indicators in collaboration with Stanley Kroll.
Chande presented traders with his own methodology in 1994. This calculated the exponential moving average (EMA) with a period of averaging VIDYA (Variable Index Dynamic Average) that changes dynamically. The averaging of the EMA was done depending on price volatility. As was shown subsequently, this indicator responds to changes in the direction or dynamics of the market more quickly and reacts to price movements more accurately.
Chande developed the Aroon indicator in 1995. It is useful for measuring the strength of a trend and the potential for its ensuing continuation. This indicator also determines the market movement type – increasing, decreasing or sideways.
The developer also created the Adaptive Stochastic Oscillator in the 90s. Although it has a number of advantages, such as working well in trading corridors, it also has a disadvantages in that it provides a big number of false signals about overbought and oversold.
Chande developed the Stochastic Relative Strength Index (Stoch-RSI) in 1994 in collaboration with S. Kroll. Their aim was to increase the sensitivity of the relative strength index (RSI), as it has a weak point in that it fluctuates between the absence of signals and the boundary lines for opening a position.
Chande and Kroll also created the Dynamic Momentum Index jointly. This indicator is similar to the Wilder’s RSI. It uses a smoothing algorithm and has a variable-width window.
Tushar Chande has written a number of books on technical market analysis, one of which is “Beyond technical analysis”.
Indicator Description
The Aroon indicator has two lines, which are known as the Arron down line (normally a red line) and the Aroon up line (normally a blue or green line).
As with other oscillator type indicators, the value of these lines range between 0 and 100. The Aroon up line uses a 100-point scale to measure the number of periods that have passed since the start of the maximum peak price. The number of periods depends on the timeframe selected. The Aroon downline measures the number of periods that have passed since the lowest depression.
Aroon up = (number of periods less the number of periods from the absolute maximum) divide by number of periods * 100%;
If the market trend is bullish, the Aroon up line is always in the 100% range as the maximums are updated so fast that each new candle is a new peak value.