The Aroon oscillator was created to reveal the beginning of a new trend, as well to indicate the strength or weakness of that trend.
Generally, the indicator calculates the time between highs and the time between lows over a certain period of time. Most often, the oscillator is applied to 25 periods.
The main idea behind the Aroon oscillator is that strong upward trends will usually perceive new highs. At the meantime, stable downside trend will see new lows.
The oscillator is represented by two lines - "Aroon Up" line estimates the strength of the uptrend, while "Aroon Down" line determines the strength of the downtrend. When the "Aroon Up" is above the "Aroon Down", the indicator reveals bullish signals. The oscillator suggests that bears prevail in the market when the "Aroon Down" is above the "Aroon Up". When two lines cross, the oscillator might signal trend changes.
Moreover, the oscillator value switches between zero and 100. The "Aroon Up" line above 50 means that the high is perceived within the last 12.5 periods. The same is for the "Aroon Down" line. If the "Aroon Up" is below 50 this means that the low was seen within the previous 13 periods. The same also applies to the "Aroon Down" line. When both lines are below 50 it can reveal market consolidation.
As the other indicators, the Aroon oscillator may provide false signals. A crossover might not always indicate trend change, as the asset price might not necessarily make a significant move. Also, the bullish or bearish signals may be developed too late. Therefore, traders should be careful and use other technical tools to analyze price movements.
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