The general wisdom is that financial markets, including binary options, require the use of various tools for price movements analysis. The Aroon indicator helps traders determine the direction of the current trend, its strength, and possible reversals. Statistics proves that the technical tool under consideration significantly increases the chances of successful transactions, as it allows you to receive more accurate signals for entering the market.
Read the article to learn more details about the specifics of the Aroon as technical analysis tool, make sense to its parameters, as well as methods of trading digital contracts. You might be surprised but such an efficient tool is available for use in the Pocket Option trading platform. Therefore, you will be able to immediately apply the material you have learned in practice.
What is Aroon Indicator?
Technical genius Tushar Chand developed the Aroon indicator in 1995. The name comes from the Sanskrit word “aroon”, which means “light of dawn”, symbolizing the beginning of a new trend. How poetic! In practical terms, traders can already conclude that the main purpose of the indicator is to follow the current trend and predict points of its reversal.
The tool belongs to oscillators and consists of two lines:
- Aroon Up (ascending line) indicates the time that has passed since the price reached its maximum value for a separately selected period.
- Aroon Down (downward line), on the contrary, indicates the time that has passed since the price reached the minimum value for a separately selected period.
The values of both lines vary from 0 to 100. You don’t have to delve into the intricacies of the tool’s formula calculations. To use the advisor, just remember that the higher the Aroon Up value, the stronger the upward trend, and vice versa, the higher the Aroon Down, the more stable the downward trend. If both lines move to low values, this may signal a sideways movement or a market slowdown.
How to set Aroon parameters
The father of the oscillator, Tushar Chand recommends setting to a specific time period depending on the asset and trading session. The standard value for most platforms is 14, which means analyzing data for the last 14 candles (days, hours or minutes, depending on the time frame).
Among other settings, only the color of the lines remains, which the user can set for the convenience of analyzing the situation. For example, the fast line is often colored red, and the slow line is blue.
Although most traders use the standard value, the instrument period can be adapted depending on the trading style and the asset being analyzed. For example, shorter periods can be used for more volatile markets.
How to trade with Aroon Indicator
Using the Aroon indicator in trading electronic contracts can make your strategy more efficient, which will increase its profitability. Below are some practical applications:
- Identify Trend
When the Aroon Up line is above 70 and Aroon Down is below 30, it indicates a strong uptrend. In such a situation, traders can consider buying binary options for a rise (CALL).
If Aroon Down is above 70 and Aroon Up is below 30, this indicates a downtrend. In this case, it is possible to buy put options (PUT).
- Generate a Reversal Signal
If the Aroon lines intersect, this may indicate a change in the current trend. So, when Aroon Up and Aroon Down intersect from bottom to top, this may be a signal of the beginning of an upward trend. If Aroon Down intersects Aroon Up in the same direction, this may indicate the beginning of a downward trend.
- Lateral movement
If both lines (Aroon Up and Aroon Down) are below 30, this signals market weakness and the likelihood of consolidation. In such conditions, it is better to refrain from opening positions, since the market does not have a clear direction, and the likelihood of false signals increases.
In conclusion, we should agree that the Aroon indicator is a useful tool for binary options traders, which helps to effectively identify trends and market reversals. However, like any technical indicator, Aroon does not guarantee 100% success. Its signals can be false, especially in sideways market conditions. To increase the effectiveness of the indicator, it is recommended to combine it with other analysis methods and follow risk management rules.
