Trading Crypto with Aroon Indicator - Crypto Academy / S5W2 - Homework Post for @fredquantum

in hive-108451 •  2 months ago 

steemit crypto academy - Aroon Indicator.jpg

Question 1 - What is Aroon Indicator in your own words? What are Aroon-Up and Aroon-Down? (Show them on Chart)

The Aroon indicator is basically a technical indicator that is used for the measurement and determination of trend changes and the strength of the trend for any cryptocurrency asset in the market. This indicator measures the time between the highs and lows of the price of any asset over a period of time. This is because, when the market is in an uptrend, there will be new highs regularly and when the market is in a downtrend, there will be new lows regularly. On the aroon indicator, there are two lines, the Aroon up and the Aroon down. The Aroon up line measures and indicates the uptrend strength and the Aroon down line measures and indicates the downtrend strength.

The Aroon indicator has proven to be really effective and powerful when it comes to measuring trend strength and trend changes and is used by a lot of traders for entry and exit points based on the crossovers of the Aroon lines. Tushar Chande was the developer and creator of the Aroon indicator in 1995. The sole purpose why the Aroon indicator was created was to measure and determine the trend changes and trend strengths of an asset over a period of time in the market. On the Aroon Indicator, the default period length is set at 14. The Aroon has two oscillator lines known as the Aroon up and the Aroon down. The Aroon lines moves between zero and hundred. When the Aroon line value is high, it indicates the strength of the trend and when the Aroon line value is low, it indicates the weakness of the trend. In an uptrend, the Aroon up line stays above the Aroon down line and in a downtrend, the Aroon down line stays above the Aroon up line.

The Aroon-Up and Aroon-Down

The Aroon up and Aroon down are the two main lines of the Aroon indicator that moves between 0 and 100. The Aroon up measures the strength of the trend in the market in an uptrend and is calculated based on price highs. In an uptrend, the Aroon up line stays above the Aroon down line. When the Aroon up line is above the 50% value and the Aroon down is below 50%, it can be an indication that the buyers are in control of the market and there is more possibility that the price will make a new selected period high. When Aroon up line moves above 50, it can be an indication that the uptrend momentum is slowing down and the momentum might be lost.

The Aroon down measures the strength of the trend in the market in a downtrend and is calculated based on price lows. In a downtrend, the Aroon down line stays above the Aroon up line. When the Aroon down line is above the 50% value and the Aroon up is below 50%, it can be an indication that the sellers are in control of the market and there is more possibility that the price will make a new selected period low. When Aroon down line moves below 50, it can be an indication that the downtrend momentum is slowing down and the momentum might be lost.

The crossovers of the Aroon up and Aroon down line can be used as a signal for trend changes. When the Aroon up line crosses above the Aroon down line it can be a signal for a reversal for a potential uptrend, and when the Aroon down line crosses above the Aroon up line it can be a signal for a reversal for a potential downtrend. When Aroon up and Aroon down are moving very close to each other, it is an indication that no strong trend is present or signals consolidation.

Screenshot (4537).png
Aroon Indicator on the AAVE/USDT Chart


Question 2 - How is Aroon-Up/Aroon-Down calculated?

Aroon-Up/Aroon-Down Calculation

Using the 25 period length
For Aroon-Up = [(N period – Periods since recent N period High) / N period] x 100

Where;
Period length specified = N period

Let’s take for instance, AAVE/USDT

Using the formula;
Aroon-Up = [(N period – Periods since recent N period High) / N period] x 100

Where;
N period = 25
Periods since recent N period High = 4 days ago

Aroon-Up = ((25 – 4) / 25) x 100
Aroon-Up = (21 / 25) x 100
Aroon-Up = 0.84 x 100
Aroon-Up = 84
Therefore the Aroon-Up = 84%

For Aroon-Down = [(N period – Periods since recent N period Low) / N period] x 100

Where;
Period length specified = N period

Let’s take for instance, AAVE/USDT

Using the formula;
Aroon-Down = [(N period – Periods since recent N period Low) / N period] x 100

Where;
N period = 25
Periods since recent N period Low = 12 days ago

Aroon-Down = ((25 – 17) / 25) x 100
Aroon-Down = (8 / 25) x 100
Aroon-Down = 0.32 x 100
Aroon-Down = 32
Therefore the Aroon-Down = 32%


Question 3 - Show the Steps involved in the Setting Up Aroon indicator on the chart and show different settings

Adding the Aroon indicator on a charting platform

The Aroon indicator is a very popular technical indicator that is common in a lot of the top charting platforms like tradingview, GoodCrypto etc. Adding the Aroon indicator on a tradingview chart is a straightforward process that only requires a few steps when making use of tradingview which is without a doubt one of the most popular charting platforms for technical analysis.

  • To do this, I will visit the tradingview platform https://www.tradingview.com. On tradingview chart interface, Click on the indicator icon which is located at the top of the screen.

Screenshot (4538).png

The next screen that pops up is the search box library containing all the available indicators on the platform. On the search input box, search the name of the indicator by typing it into the search to search for it in the library. I typed in Aroon on the search. Select the first indicator with the name Aroon.

Screenshot (4539).png

Screenshot (4540).png

Screenshot (4541).png

In the Aroon indicator panel, click on the settings gear icon

Screenshot (4542).png

For the Aroon indicator, there are three main sections on the settings; input, styles and visibility section.

Input - The Aroon indicator has a simplified input with only the period length input. The default period length input for the Aroon indicator is 14, however, it can be changed depending on the needs and strategy for the technical analysis. This input can be reset back to default settings by just selecting reset settings on the defaults drop-down.

Screenshot (4543).png

Styles - This settings is basically for changing the look of the different elements of the Aroon indicator. The styles settings allows the user to the colour of the Aroon up line and the Aroon down line as well as the line thickness and shape of the Aroon up and Aroon down lines. This is just for visual preferences. As always, the styles settings can be reset back to default by selecting reset settings on the defaults drop-down.

Screenshot (4544).png

Visibility - This settings is basically for switching on and off different elements on the chart. This is solely for preferences in the technical analysis. By default, all elements are toggled on.

Screenshot (4545).png


Question 4 - What is your understanding of the Aroon Oscillator? How does it work?

The Aroon indicator is not to be confused with the Aroon oscillator as they work differently. The Aroon oscillator is also a technical analysis tool that basically measures the strength of a trend and is determined by doing a subtraction of the Aroon Down from the Aroon Up or simply put, the difference between the Aroon up and Aroon down. Like the Aroon indicator, Tushar Chande was also the developer of the Aroon Oscillator in 1995. The whole idea of the Aroon is to help traders and technical analysts determine whether the price of an asset is trending in the market and if the price is trending, what the strength of the trend is.

Unlike the Aroon indicator that has two lines the Aroon up and the Aroon down that moves between 0 and 100, the Aroon oscillator line oscillates between -100 and +100 with 0 as the center value and also serves as the crossover point. If the price is moving in an uptrend, the Aroon oscillator line moves towards its upper limit and if the price is moving in a downtrend, the Aroon oscillator line moves towards its lower limit. When the Aroon oscillator line moves above 0, it is an indication of a possible incoming upward trend. When the Aroon oscillator line moves below 0, it is an indication of a possible incoming downward trend. The strength of the trend is determined how close the Aroon oscillator value is to either extreme.

Screenshot (4546).png
Aroon Oscillator on the AAVE/USDT Chart


Question 5 - Consider an Aroon Indicator with a single oscillating line, what does the measurement of the trend at +50 and -50 signify?

The Aroon indicator with a single oscillating line is basically a type of Aroon indicator that combines the Aroon up and Aroon down into a single oscillating line. The Aroon indicator with a single oscillating line has a single line that moves between the values of -100 and +100. In the Aroon indicator with a single line, when the oscillating line has a value of 0 which is the center line, it can be an indication that there is no trend present or the ranging market is present or the consolidation in the market.

When the oscillating line moves above the value of +50, it can be an indication of a bullish trend. When the oscillating line moves below the value of -50, it can be an indication of a bearish trend. The Aroon indicator with a single oscillating line provides valuable trading signals. When the Aroon indicator oscillating line moves above the value of +50 or higher and closer to the +100, it is an indication of a strong upward trend. When the oscillating line moves below the value of -50 and closer to the -100, it is an indication of a strong downward trend.

Screenshot (4547).png

Screenshot (4550).png


Question 6 - Explain Aroon Indicator movement in Range Markets.

On the Aroon indicator, when the market is ranging or in a consolidation market, it means that there is no trend present and that both the buyers and the sellers are at equilibrium. At this point, the market moves up and down but within a resistance level and support level. The Aroon indicator is a great indicator that can be used to identify a ranging market. When using the Aroon indicator to identify a ranging market, attention has to be paid to the Aroon up and Aroon down lines. When the Aroon up and the Aroon down lines are parallel to each other or moving lower and closer to each other, then it is an indication that there is no trend present and that the market is most likely ranging or consolidating. This shows that there were no new highs or new lows within the selected period.

Screenshot (4552).png


Question 7 - Does Aroon Indicator give False and Late signals? Explain. Show false and late signals of the Aroon Indicator on the chart. Combine an indicator (other than RSI) with the Aroon indicator to filter late and false signals.

Yes, the Aroon indicator isn’t perfect and is also liable to give false or late signals. Even though the Aroon indicator is a very powerful and effective technical indicator, it is still not 100% perfect just like every other technical indicators. There are always false signals that might be present that is why it is important to always confirm signals by making use of a combination of multiple indicators. From the BNB price chart, we can see that after the golden cross was formed on the 20 and 50 EMA, the price remained above the EMA lines which is a strong indication that the price is still in an uptrend, however, the Aroon indicator was signaling that the trend is slowing down with the Aroon down moving above the Aroon up line. This is a false signal because the trend is still strong and went on to create new highs.

Using the Aroon Indicator with the EMA

Even though the Aroon indicator is known to provide accurate and good buy and sell signals, it is always a good idea to combine it with other tools and indicators for signal confirmation, as this will help filter out false or late signals before making any trading decision. The moving average indicator is a great tool that not only indicates trend in the market but also great for buy and sell signals. For this, I will be making use of the 20 EMA and 50 EMA to confirm the signals of the Aroon indicator.

Screenshot (4555).png
BNB/USDT Chart

From the BNB/USDT chart, we can see that the Aroon up line crossed above the Aroon down line. This crossover is a good buy signal for a potential uptrend. The EMA confirmed this signal as the 20 EMA line crossed above the 50 EMA line. The Aroon up value moved towards the upper limit and the Aroon down value moved towards the lower limit. Both the Aroon up and Aroon down are far apart from each other which indicated a strong bullish trend. The strength of the bullish trend was also confirmed as the price remained above the EMA lines.

Screenshot (4554).png
BNB/USDT Chart

From the BNB/USDT chart, we can see that the Aroon down line crossed above the Aroon up line. This crossover is a good sell signal for a potential downtrend. The EMA confirmed this signal as the 20 EMA line crossed below the 50 EMA line. The Aroon down value moved towards the upper limit and the Aroon up value moved towards the lower limit. Both the Aroon down and Aroon up are far apart from each other which indicated a strong bearish trend. The strength of the bearish trend was also confirmed as the price remained below the EMA lines.


Question 8 - Place at least one buy and sell trade using the Aroon Indicator with the help of the indicator combined in (7) above. Use a demo account with proper trade management.

Buy – ANKR/USDT

On the ANKR/USDT chart, I made use of the Aroon indicator in combination with the EMA for buy signal on the ANKR/USDT pair made on the 1hr time frame. From the chart, the Aroon up line crossed above the Aroon down line which was a good buy signal. The signal confirmation was done with the 20 EMA and 50 EMA. The golden cross was already formed on the EMAs and the price was rising above the 20 and 50 EMA lines. For me, this was a good buy signal and confirmation for a buy. I entered the market at 0.17087 USDT and using the 1:1 risk-reward, I set my take profit at 0.19414 USDT and my stoploss at 0.14414 USDT.

Screenshot (4557).png
ANKR/USDT Chart

Sell – MATIC/USDT

On the MATIC/USDT chart, As usual, I made use of the Aroon indicator in combination with the EMA for sell signal on the MATIC/USDT pair made on the 1hr time frame. From the chart, the Aroon down line was above the Aroon up line nearing the upper limit. The death cross had already formed on the EMA lines. However, the Aroon down line was moving down towards the lower limit. However, the 20 and 50 EMA line didn’t not show any sign of trend reversal into the uptrend as the price was still below the 20 EMA and 50 EMA lines. The price was falling below the 20 and 50 EMA lines and for me, this was a good sell signal. I entered the market at 1.635 USDT and using the 1:1 risk-reward, I set my take profit at 1.733 USDT and my stoploss at 1.533 USDT.

Screenshot (4556).png
MATIC/USDT Chart


Question 9 - State the Merits and Demerits of Aroon Indicator

Merits

  • The Aroon indicator is an easy to use and simplified indicator that makes it easy for anyone to read the trends and strength of the trend in the market.

  • A very powerful indicator for identifying changes in trends in the market.

  • It can provide very good entry and exit signals especially when it is used in combination with other tools.

  • The Aroon indicator is known to generate very good buy and sell signals when combined with another technical indicator.

  • The indicator gives the freedom to be used on any timeframe and period length.

Demerits

  • Like most technical indicators, the Aroon indicator is also known to provide false or late signals on the chart.

  • It is not great for providing signals singlehandedly and needs to be used in combination with another indicator or tool for signal confirmation.

  • It is mostly period based and doesn’t take into consideration the size of the moves. That is why other indicator is required in combination to make the best trading decision.

Conclusion

The Aroon indicator has not only shown that it is a very powerful indicator when it comes to measuring trends in the market and the strength of the trend in the market, it has also proven to be very easy and simple to use. This is a big advantage as anyone can load up the indicator on the chart for technical analysis and price direction predictions. The Aroon indicator is not only powerful for identifying changes in trends in the market, traders can make use of this indicator for effective buy and sell signals and entry and exit signals when used in combination with other technical analysis indicators like MACD, RSI, EMA etc. However, it is very important to know that the Aroon indicator also gives false and late signals, that is why combining the Aroon indicator with other strategies, indicators or tools is a great way to make better trading decisions.

@fredquantum

Authors get paid when people like you upvote their post.
If you enjoyed what you read here, create your account today and start earning FREE STEEM!
Sort Order:  
Loading...