INSUBCONTINENT EXCLUSIVE:
Grant a stock trader a wish, he will ask for a sureshot technical indicator that can spot market trends before anyone else can see
them.
Tushar Chande is a familiar name among stock traders who swear by technical charts
With over two decades of experience in futures market, Chicago-based Chande has developed many breakthrough technical indicators, some of
which are immensely popular among traders.
A co-author of the widely acclaimed book, The New Technical Trader, Chande developed a new
technical indicator, called Aroon, in 1995, which has since caught on with many traders
The indicator is used to spot early trend.
Aroon, named after light of early dawn, focuses on time relative to price and can be used to spot
the onset of a trend at its early stage.
Aroon can help measure the strength of a trend apart from identifying consolidation phases and
spotting trend reversals, says Mazhar Mohammad, a chartist himself, who is the Chief Strategist for Technical Research and Trading Advisory
at Chartviewindia.in.
Other momentum oscillators also do the same thing, but Aroon is different, in the sense that it focuses on time
relative to price.
Understanding AroonHere’s how the indicator is calculated, plotted, read and interpreted
Aroon indicator is shown in percentage terms
It is a rangebound indicator and typically fluctuates between 0 and 100
At any point, not one, but two Aroon indicators — ‘Aroon Up’ and ‘Aroon Down’ are plotted side by side for easy comparison
One crossing the other signals the onset of a new trend.
With a default parameter of 25, a 25-day Aroon Up measures the number of days from
a 25-day high price in a security
A 25-day Aroon Down measures the number of days since it hit a 25-day low
And 50 is the cutoff point on the chart
On daily charts, Aroon is either below 50 or above 50.
How it worksThe indicators fluctuate above or below the central line, which is 50, by
When Aroon-Up is above 50 and Aroon-Down is lower than 50, that gives an edge to the bulls
The opposite marks a downtrend.
The bears would have an edge when Aroon-Up is below 50 and Aroon-Down is above 50
And when the Aroon indicator surges to 100, it signals emergence to a new trend.
Look at the chart of Bajaj Auto stock, which had the Aroon
Up indicator at 72 (above 50) at close on May 11, while Aroon Down was at 16 (below 50), indicating a bullish setup.
To further confirm a
trend signalled by Aroon, one can look at other technical indicators such as Relative Strength Index (RSI), Bollinger Band.
“Parallel
movement of both Aroon Up line and Aroon down line would suggest a consolidation phase
A crossover of Aroon Down line above Aroon Up line would signify a trend reversal in favour of the bears and vice versa,” Mohammad
said.
“Aroon Indicator is useful in identifying periods of consolidation
When a security is consolidating, both Aroon Up and Down indicators are seen running parallel to each other
When one of them surges to 100, if signals the end of consolidation and onset of a new trend,” said Milan Vaishnav, Technical Analyst,
Gemstone Equity Research and Advisory.
If the Aroon Up surges to 100, usually a consolidation pattern is resolved with an upside breakout
and when Aroon Down tests 100, it signals onset of a downside resolution.
