How to Trade the Aroon Indicator
Finding the direction of the trend is one of the most difficult tasks designated to any trader. A good example is the AUDCAD daily chart below. We can see price currently declining over 306 from its June 7th high which ended a 643 pip advance. So should a trader look to buy or sell the AUDCAD? How can we know if the trend has turned? Today we will look at an indicator to help us find the markets current directional bias. Let’s learn about the Aroon indicator.
The Aroon indicator is derived from two lines, Aroon Up and Aroon Down. Both lines run in a marked range between 0-100 to help define a currency pair’s strength or weakness. The Aroon Down is depicted as a green line and as its name suggests helps track price in a downtrend. Aroon Up is depicted as a red line and measures the strength of an uptrend. Traders will watch both lines as they oscillate between 0-100 and change their market preference as one line crosses above the other. If Aroon Down is above Aroon Up the trend is considered down with price expected to go lower. The opposite holds true if Aroon Up is residing above Aroon down. With this in mind let’s go back and look at our AUDCAD example.
In the chart below we again see the AUDCAD daily chart, this time with the Aroon indicator. We can clearly see that Aroon Down has crossed over Aroon Up. This signal indicates that momentum of the currency pair has shifted and a new downward trend is developing. Traders then will expect price to continue to decline. This preference would be invalidated if the Aroon Down line crosses the Aroon Up line from above. As the indicator is showing prices moving lower, trend traders should continue to look for fresh selling opportunities.
My preference is to look for continued weakness on the AUDCAD as long as Aroon Down resides over Aroon UP. One way to trade this market bias is to look for breakouts to lower lows. As indicated in the analysis above our low for this move resides at 1.0292, and traders can prepare with entry orders if this level is breached.
An alternate scenario includes price moving to higher highs. If this occurs traders will be notified as the Aroon Up crosses the Aroon Down.
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