In 1995, Tushar Chande has developed the Aroon indicator system that determines whether the market is tending or not; it gauges the strength of the trend. Aroon is a Sanskrit word meaning dawn’s early light, and the indicator is so named as it is designated to signal the beginning of new trends.
Aroon consists of two separate indicators: Aroon-Up (AU) and Aroon-Down (AD) measuring the number of periods since price records an x-day high or low. Both lines run in a marked range between 0-100 (usually in opposite directions).
For instance, A 14-day Aroon-Up measures the number of days since a 14-day high, while Aroon-Down measures the number of days since a 14-day low and that is why it is completely different from oscillators. Oscillators focus on price relative to time but Aroon focuses on time relative to price.
Trading with Aroon indicator:
Technical analysts can use the Aroon indicator to spot under-construction trends, identifying consolidation periods; define corrections and anticipating the reversals.
A new trend is indicated by the Aroon up and down lines crossing over each other, while the strength of the current trend is indicated by the Aroon up and/or downlines being at or near 100.
When the Aroon up and down lines run parallel to each other, it is a signal that the price is in a sideways consolidation mode. This case is frequently occurring before a pending breakout or a price explosion. Traders should wait for a significant signal before initiating new positions.
Using Aroon indicator in lower time frames-such as 15 or 30 minutes- will give many false signals. So that, I prefer using Aroon on daily and weekly charts.
Positions should be placed after the last candle close, while we have a confirmed crossover.
Adding momentum indicators such as Stochastic- reduces false signals of Aroon.
In the chart below we see the GBPUSD daily chart with Aroon indicator where we clearly can see signals given by the indicator in all cases.