The Forex market is an environment where the trends are subject to swift and sudden changes. Many traders, especially the new ones, struggle to foresee these changes, thus losing out on lucrative trading opportunities. In order to identify major trend shifts, there needs to be a proper set of tools at your disposal, and the Aroon Indicator is one such tool that helps you pinpoint a trend shift and assess its intensity.
What is the Aroon indicator?
The Aroon indicator is a flexible technical oscillator that gives a definite indication of a trending asset and allows you to measure the trend’s strength. There are two lines that make up this indicator, with the upper blue line in the chart below signaling an uptrend and the red line signaling a downtrend. It concentrates on time with respect to the price, and Forex traders often use it to foresee trend reversals, pinpoint correction phases, and spot consolidation periods.
Usually, the indicator deals with a time period of 25 hours or days, but you can make adjustments to the period per your trading scheme. If the strategy deals with a huge number of items, it can be lowered, but a long-term scheme demands the short-term swings to be ignored and for the time period to be longer. Your choice should also depend on the currency you are trading.
How to read an Aroon indicator chart?
The above chart depicts the Aroon Indicator with a time period of 14, located below a day trading chart for the AUD/USD pair. Here, you should carefully note the peaks, the troughs, and how they are positioned at the same point in time. While this indicator is responsive to the highs and lows of the subsequent price movement, it is indecisive when it comes to the ranging periods.
Through this oscillator, you can also get an idea about the direction in which the price momentum is about to shift. You can draw many inferences from the trader sentiment and direction of the trend depending on how the two lines are positioned with respect to one another. In this regard, you should keep the following points in mind:
- When the blue line in the example above lies above the lower red line, it signals an uptrending market.
- When the opposite situation arises, the Aroon indicator depicts a down-trending market.
- There should be a shift in the condition of the market when the two intersect each other.
Trading strategy
There are three strategies for trading Aroon indicator. We look at each of them in more detail.
Breakout trading
The Aroon indicator lets you pinpoint breakouts and consolidation points while trading in currencies. A surefire way of recognizing price consolidation is when the two Aroon lines are parallel. In this scenario, you have a couple of options.
You could stand by until the breakout takes place and then place your trades in the appropriate direction, or you could judge the trade’s direction more accurately by waiting for the crossover preceding a centerline cross.
Before the occurrence of the real breakout, you will get to see several signals related to this indicator. By anticipating the breakout, you can place your entries prior to other traders and make some early gains.
Aroon rainbow forex scalping
If you are the kind of a trader who intends to make small profits consistently during business hours, this strategy will suit you well. For this purpose, you can choose a time frame of 1, 5, or 15 minutes and deal with a currency pair that has a low spread in order to maximize your gains.
The above chart shows a buy trade. You should make a long entry when the green line and the vertical blue lines are both situated higher than zero. This tells you that the pressure of price is in the upward direction, thus a buy signal is impending.
The second thing to look out for is the intersection of the 12 EMA line by the Rainbow indicator’s purple lines as the asset price remains somewhere above. This is a clear indication of an uptrending market phase.
You should exit the trade or collect your profit when the green line goes below zero, signaling that the power of the bull is weakening. Additionally, you should exit your trade if the closing point of the price lies beneath the Rainbow indicator’s lines or in case it intersects the 12 EMA line and moves further down.
The above chart shows a sell trade. You should place a sell order if both the green and vertical lines lie beneath zero. A further indication of a downtrend can be achieved when the Rainbow indicator’s purple lines intersect the 12 EMA line and move downward.
Trend strength
When the indicator is consistently approaching 100, a solid trend can be expected. At this point, traders either expect a pullback or reversal. Nevertheless, if you are using a scalping strategy, you can make your exit at the point when the upper line intersects the centerline and moves downward.
In case the up line shies away from 100 and starts moving towards zero, you can expect the price to follow it. If this does not occur, however, and the shift in price is negligible, you can say that the bullish trend is exceptionally strong.
Limitations
You would do well to remember that the Aroon indicator is not 100% accurate and is known for generating the odd false signal. You can get a purchase or sell indication when it’s already too late and the price has already shifted. This is mostly because it is a retrospective indicator.
Summing up
Now you know about this indicator, you can apply it on price charts to forecast trends. But, it is advisable that you use other oscillators and price analysis techniques alongside this to make more accurate predictions.