Hello everyone, hope you all are doing good? I'm back with the Part 3 and Final Part of this amazing series, Understanding Aroon Indicator. If you haven't read the Part 1 and Part 2, I strongly suggest you do that by clicking here for Part 1 and here for Part 2. In today's article, we would be looking at Aroon Indicator movement in range market, how to filter false signals and the merits & demerits of the Aroon indicator.
From my understanding, Range market occurs when price is consolidating. What that simply means, is that, there isn't any trend direction.
During this period, traders should be vigilant as this is an opportunity to wait for a perfect buy or signal signal, because price can't be consolidating forever. Look at the image below for more understanding.
Now, how does Aroon indicator moves in a range markets? The Aroon-Up and Aroon-Down will be parallel to each other and they won't be any crossovers during such period, because there's no trend direction.
As you can see from the image above the two oscillating lines are parallel to each other and there wasn't any crossover during that period.
How To Filter False Signals & Late Signals
Aroon Indicator gives false and late signals like almost every other kind of technical trading indicator. The reason why Aroon Indicator gives a false and late signals is because it is a lagging indicator, hence, sometimes a trend movement might have already occurred before traders will see the signal on the Aroon indicator, thus, such an opportunity has gone by.
As you see from the image above, the Aroon Indicator gave a false signal.
As you see from the image above, the Aroon Indicator gave a late signal.
Filtering False & Late Signals Of The Aroon Indicator
In other to be able to filter false & late signals of the Aroon Indicator, we would have to add another indicator that we can use to confirm a trend direction.
I will be making use of the Ichimoku-kinko-hyo Indicator to confirm a trend direction, hence, filtering false & late signals of the Aroon Indicator.
The Ichimoku-kinko-hyo Indicator is well known for predicting market trends and market trends reversals. Whenever the cloud is below price, that's strong bullish trend and whenever the cloud is above price, that's strong bearish trend.
Before making an entry, you need to ensure that the Ichimoku-kinko-hyo Indicator market trend prediction tallies with Aroon indicator's indicator market trend prediction. Look at the image below for more understanding.
Merits Of Aroon Indicator
It assist traders to predict the direction of the market trend.
It assist traders to know the strength of the predicted market trend.
It assist traders to predict market reversals.
It is very easy to use and understand which is very handful for traders at the beginner levels.
Demerits Of Aroon Indicator
It is highly not recommended for short term or scalp traders, because the indicator sometimes gives late signals.
It sometimes gives false signals which can result to traders making losses.
It is not a standalone indicator, as it needs a confirmation indicator or trading strategy in order to make better use of it.
Aroon Indicator is truly a very good oscillator-based indicator that helps traders know when to expect a bearish trend, bullish trend and a trend reversal and also strength of the trend. In all, it is fantastic indicator for traders to use alongside a confirming indicator like the Ichimoku Indicator, to predict trends direction more effectively.