The Aroon Indicator is a technical analysis tool used to identify trends in a financial market and the likelihood of the trend continuing. It was developed by Tushar Chande in 1995. The Aroon Indicator consists of two lines: the Aroon Up line and the Aroon Down line.

Here’s how the Aroon Indicator works:

1. **Aroon Up (AU):** This line measures the number of periods since the highest closing price. If the highest closing price over the last \(n\) periods occurred \(x\) periods ago, then Aroon Up is calculated as \(\frac{{n – x}}{{n}} \times 100\). A higher Aroon Up value indicates a stronger upward trend.

2. **Aroon Down (AD):** This line measures the number of periods since the lowest closing price. If the lowest closing price over the last \(n\) periods occurred \(y\) periods ago, then Aroon Down is calculated as \(\frac{{n – y}}{{n}} \times 100\). A higher Aroon Down value indicates a stronger downward trend.

The Aroon Indicator is often represented as a oscillator ranging from 0 to 100, with key levels at 50. Here’s how traders typically interpret the Aroon Indicator:

– **Aroon Up above 50:** Indicates a strong upward trend.

– **Aroon Down above 50:** Indicates a strong downward trend.

– **Aroon Up below 50:** Suggests a weak upward trend.

– **Aroon Down below 50:** Suggests a weak downward trend.

– **Aroon Up at 100 and Aroon Down at 0:** Suggests a strong and sustained upward trend.

– **Aroon Down at 100 and Aroon Up at 0:** Suggests a strong and sustained downward trend.

Traders often look for crossovers or divergences between Aroon Up and Aroon Down lines to identify potential trend changes. For example, when Aroon Up crosses above Aroon Down, it may signal the beginning of an uptrend, and vice versa.

As with any technical indicator, it’s important for traders to use the Aroon Indicator in conjunction with other analysis tools to confirm signals and avoid relying on it in isolation. Additionally, the choice of the lookback period (the number of periods used in the calculations) can influence the indicator’s sensitivity to price movements.