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An Aroon indicator is a technical display that helps investors recognize trends in the market for a given asset. It also determines whether a trend is likely to continue unabated or whether it will end. The Aroon indicator consists of two oscillating lines, a bullish uptrend line and a bearish downtrend line, both of which fluctuate between values of zero and 100. Higher value numbers indicate stronger trends. When the two lines oscillate to opposing ends of the scale, the identified trend, whether up or down, is definitive.
For example, imagine the Aroon indicator for a lithium company shows the bullish line moving between 70 and 90, while the bearish line moves between 10 and 30. Movements above 70 by the bullish line exhibit a strong uptrend, while movements below 30 by the bearish line indicate a weak tendency toward a downtrend. This combination confirms the likelihood that the stock price will continue to move upward. On the other hand, movements between 30 and 70 express uncertainty within the market. Crossovers between the two lines in the region between 30 and 70, with one line tracking up and one line descending, represent confirmations of a trend in the direction of the rising indicator line.
The Aroon indicator lags behind the market. For this reason, the indicator will not accurately predict either sharp price drops or spikes for a highly volatile stock. In order to determine the best time to join or leave the market, investors use a variety of indicators, such as volume reversal candles, to supplement the information obtained from the Aroon indicator. The Aroon indicator lines describe the relative percentages of time in which the stock has been in an upward trend versus a downward trend, assuming that the stock price will close at a record high or low, depending on the dominant trend.
Similar to the Aroon indicator, the directional movement indicator (DMI) differentiates between strong and weak trends and identifies the trend direction. This indicator consists of a moving average over time, with a +DMI line indicating ascending price change and a –DMI line indicating descending price movement. The line on top, the dominant line, reveals the trend direction, while the value of the line, ranging from zero to 100, shows the strength of the trend. DMI values over 25 signify a strong directional trend, while values under 25 indicate weak directional trends. Just like crossovers occurring in the Aroon indicator, crossovers of the DMI lines may indicate directional price changes, but they can give false impressions with low volatility.
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