Mikula Forecasting Company

Mikula Forecasting Company: Strategy #18: Using the Aroon

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Written by: Patrick Mikula CTA
Copyright (c)2003-06 by Patrick Mikula All Rights Reserved. (Please to not copy or foreword this article).

Mikula Forecasting Company
P.O. Box 152672
Austin, TX 78715-2672
USA
www.MikulaForecasting.com
support@MikulaForecasting.com
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This article will discuss the indicator named Aroon. The Aroon indicator has two main lines. First is Aroon Up which represent the position of the high with the range of high prices over a look back period. The second line is Aroon Down which represents the position of the low price within the range of low prices over a look back period. This means a market that makes a new high will have an Aroon Up value of 100 and when the market makes a new low the Aroon Down line will be at 0. When both Aroon lines are declining the market is consolidating. When both Aroon lines fall below 50 the market is over-consolidated and a breakout should occur. It is common to see a large range day soon after both Aroon lines fall below 50. The first chart below shows the November 2004 soybean contract. This chart shows that both Aroon lines fell below 50 in early May and two days later there was a large range day in soybeans.



The next example shows the gold futures contract. Both Aroon lines fell below 50 in August 2004 and three days later there was a large range day. When both Aroon lines fall below 50 the market is over-consolidated and a large range day often occurs.



The next example has three occurrences of both Aroon lines falling below 50. This chart shows the daily Euro-Currency. At point A both Aroon lines went below 50. At point B just two bars later the market had a large range day. At point D both Aroon lines again want below 50. At point C there was a modest size range, but not a large range day. Finally at point E both Aroon lines again went below 50 and two bars later at point F there was a large range day. In some markets the Aroon lines will not both go below 50 very often in other markets, such as the Euro-Currency chart below, the Aroon lines will fall below 50 every few months.



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To see more examples of the Aroon indicator read the version of this article on the MarketWarrior owners page.