Trading Crypto with Aroon Indicator - Crypto Academy / S5W2 - Homework Post for @fredquantum.
Good day everyone. Thanks to @fredquantum for such a wonderful lecture on Trading Crypto with Aroon Indicator. I will be doing the homework from the lecture, so sit back and look for somewhere quite quiet and comfortable as you read through this amazing article I created just for you(😉). Let's get started!!!
Question 1: What is Aroon Indicator in your own words? What are Aroon-Up and Aroon-Down?
From my understanding of Aroon indicator, it is a technical indicator that helps traders determine/predict which direction a market trend is about to go, the strength of the market trend and if a trend reversal is about to occur.
The Aroon indicator will help traders know if it will a bullish or bearish market trend. After determining which trend, this amazing can also help traders know if the market trend is weak, strong or just consolidating. Finally, this indicator helps traders to know when trend reversal is about to occur. What this means, is that, whenever a bullish trend wants to change to bearish trend(and vice versa), traders can know using the Aroon indicator adequately.
The Aroon indicator is made up of two lines which ranges between 0 - 100 and helps traders to determine the direction of a market trend, strength of the trend and when a trend reversal will occur. These lines are;
- Aroon-Up
- Aroon-Down
- Aroon-Up: The Aroon-Up is an oscillating line, which indicates a upward/bullish trend. Whenever the Aroon-Up line is above Aroon-Down line, it is an indication of a bullish trend.
From the image above you can see that whenever Aroon-Up is above Aroon-Down, there's upward movement of price, thus, a bullish trend.
- Aroon-Down: The Aroon-Down is an oscillating line,which indicates a downward/bearish trend. Whenever the Aroon-Down line is above the Aroon-Up line, it is an indication of a bearish trend.
From the image above, you can see that whenever Aroon-Down is above Aroon-Up, there's a downward movement of price, thus, a bearish trend.
Question 2: How is Aroon-Up/Aroon-Down calculated?
Calculating the Aroon-Up and Aroon-Down is quite simple by using it's formula, which is;
During my research on the Aroon Indicator and it's oscillating lines(Aroon-Up & Aroon-Down), I discovered the best period used for calculating the Aroon-Up and Aroon-Down is the default period which is 25 period(days).
Let's take for instance the Maximum price of STEEM is $8 and the Minimum price of STEEM is $5 within a period of 25 days. How do we calculate the Aroon-Up and Aroon-Down?
Aroon-Up = ((25 - 8) / 25) x 100
Aroon-Up = (17 / 25) x 100
Aroon-Up = 0.68 x 100
Aroon-Up = 68
Aroon-Down = ((25 - 5) / 25) x 100
Aroon-Down = (20 / 25 ) x 100
Aroon-Down = 0.8 x 100
Aroon-Down = 80
From the calculations above, we can predict the market trend to be bearish, because Aroon-Down seems to be above Aroon-Up, which is an indication of a Bearish market trend.
Question 3: Show the Steps involved in the Setting Up Aroon indicator on the chart and show different settings.
I will be showing you the steps on how you can set up Aroon Indicator on the chart of Huobi Exchange platform.
As soon as you are on the main page of Huobi Exchange, click on Spot Trading which can be found at the headers section. When you click it, you will see a dropdown, click on Exchange. Look at the image below for more understanding
That will lead to exchange section of the platform. Now you can see where you can be able to choose your preferred coins pairing, the chart and others. To view your chart better, click on Full Screen. Look at the image below for more understanding.
Congrats, you are now looking at your chart on Full Screen. Now you should add Aroon Indictor to your chart. You will have to click Index, which can be found at the top sections of the page. Look at the image below for more understanding.
When you click on it, you can then search for Aroon indicators and then click on it.
Boom!!! You can now see your Aroon indicators on your chart.
You can modify the indicators to suit your preference and also know and choose which color you want as your Aroon Up and Aroon Down lines, just by clicking on the indicator setting, which is known as Format on Huobi Exchange. Look at the image below for more understanding.
Here is how the Style setting for Aroon indicator looks like(image below). For me I changed the Aroon Up color to Green, signifying a Bullish line and Aroon Down color to be Red signifying a Bearish line. You can also increase the intensity of the color, so that you will be able view your indicators better.
Take a look at the change.
For the input setting, you have your Aroon Length at 14, default setting. But it is believed that the best and most used length is 25, hence, I will be changing my length to 25.
Question 4: What is your understanding of the Aroon Oscillator? How does it work?
The Aroon Oscillator isn't same with Aroon indicator, as it is the difference between the Aroon-Up and Aroon-Down. The Aroon indicator ranges between 0 - 100 but the Aroon Oscillator ranges between -100 to 100.
The Aroon Oscillator does the same function of the Aroon indicator, as they both help traders predict market trends and strength of the market. But the Aroon Oscillator has a better parameters that helps traders know the strength of a market.
If Aroon Oscillator is -50 and lower, it indicates a strong bearish trend and if the Aroon Oscillator is 50 and above, it indicates a strong bullish trend. Lastly, if the Aroon Oscillator is 0, it indicates that the market is consolidating. With some images below, you will have more understanding of the Aroon Oscillator.
As you can see from the image above, whenever Aroon Oscillator is above 50, there's a bullish trend and whenever it below -50, there's a bearish trend.
Based on the illustration on Question 2 where Aroon-Up was 68 and Aroon-Down was 80. The Aroon Oscillator will be -12 (68-80), which indicates a weak Bearish Trend.
Question 5: Consider an Aroon Indicator with a single oscillating line, what does the measurement of the trend at +50 and -50 signify?
Whenever the Aroon oscillating line is at +50 and -50, it signify the market trend and market strength.
If the Aroon oscillating line is moving upwards towards +50, it signifies a bullish trend and once it is over +50, it signifies a strong bullish trend. That is a buy signal for traders. Take a look at the image below for more understanding.
If the Aroon oscillating line is moving downwards towards -50, it signifies a bearish trend and once it is over -50, it signifies a strong bearish trend. An opportunity for traders to sell. Take a look at the image below for more understanding.
Question 6: Explain Aroon Indicator movement in Range Markets
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.
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.
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.
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.
SOL/USDT - BUY TRADE
ENJ/USDT - SELL TRADE
Question 9: State the Merits and Demerits of Aroon Indicator.
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.
Conclusion
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.
Special thanks to you, @fredquantum, for organizing this amazing class and giving this nice assignment, as it has helped me in the understanding of Aroon Indicator.