How to use the Aroon Oscillator when Investing

Investors have many tools to help guide their decision-making in the market. Whether to buy or sell, in many cases, is the net effect of what trends investors can decipher about a stock’s up or down momentum. The Aroon Oscillator is one such tool, helping guide savvy investors by gauging the impact of a current trend, whether up or down.

Aroon Oscillator

An Aroon Oscillator is a measuring system in which the use of an Aroon Indicator (Aroon Up or Aroon Down) identifies a current trend and the strength or weakness of that trend. The oscillator measurement is obtained by subtracting the Aroon Down from the Aroon Up; a number above zero indicates an upward trend, while a number below zero shows the opposite. Traders often focus on a stock’s movement in either direction as the start of a new trend, while those hovering at zero tend to indicate a period of consolidation.

Aroon Indicator

Using a system based on the Aroon Oscillator requires a fundamental understanding of Aroon Up and Aroon Down, which are measuring results taken from the Aroon Indicator. Created by Tushar Chande in the mid-1990s, this stock indicator is based on the fundamental idea that a stock’s price will close at record lows in a downtrend and at record highs in an uptrend.

This concept is similar to that of Welles Wilder who created the DMI or directional movement index. In both systems, the indicator in question is used to identify the strength of a trend.

Why are trends important to the investor? They demonstrate the underlying security of a stock and the reasonable likelihood that a stock will keep moving in the same direction. By knowing a stock is continuing upward, an investor can use the Aroon Oscillator to determine the best time to sell a stock, and vice versa, the ideal time to pick up some financial bargains when stocks trend downward. As these indicators approach zero, a leveling out of price means that the chosen stock appears to be coming to a resting price.

Specifically, the indicator measures the amount of time it takes for a stock to reach a high or low price from a specified start time. Each of these numbers is considered as a percentage of the overall total.

Value of the Aroon System

The Aroon Indicator measurements are most valuable when stocks are in a state of movement. Conversely, the Aroon Oscillator is most helpful during times of range-bound markets, not when markets are volatile. According to the Aroon Oscillator measurement, a trend above 50 suggests a strong upward trending market, while a measurement below -50 shows a downward movement.

Of course, like any tool available to an investor, this system is but one piece of the stock puzzle. Being able to understand and apply concepts such as the Aroon Indicator and Aroon Oscillator provide further information on which to base decisions to buy or sell, or simply wait out a discouraging market trend.