What is the Aroon Indicator and how can I use it to make money trading the S&P500?


Hello this is Mark from Tradinformed.com and
welcome to this video on What is the Aroon Indicator and how can I use it to make money
trading the S&P 500? So firstly, what is the Aroon Indicator?
I’m going to have a look on this chart, and you can see at the bottom of the chart there
is the Aroon. It looks like, at first glance, a little bit similar to other oscillators.
We have 2 lines here, with the green lines controlling the longs, the buys. And the red
lines controlling the sells, or the shorts. However, if you look at it a bit more closely.
What is distinctive about the Aroon, is it’s quite jerky and it moves it a fairly smooth,
or rather, very smooth fashion. Now the reason for this is, unlike other oscillators, the
Aroon is actually measuring, it’s not measuring price, and it’s not measuring volume. What
it’s actually measuring is time periods. So we’re using a 25 period Aroon and this chart.
100 is always the strongest and 0 the weakest. Shows when we have this green here, we’ve
actually made a 25 day breakout. And we as we see the breakout continues, we’ve got another
25 breakout here, a little bit further on. And gradually, as the trend weakens here,
we can see the Aroon weakens. 100 for the red line, is a 25 day breakout or breakdown
to the downside. And we see, as this wanes here, we have equally a strengthening in the
price. So we can use the greens to indicate strength and the reds to indicate weakness.
So what is the strategy that I am proposing? Well i’d like to first of all, have a look
at my new eBook. Which is available now, in the Amazon Kindle Store. In this eBook, I
have published exactly how to calculate using Excel, 21 Technical Indicators and Chart Patterns.
These include: Haikin-Ashi, Value Charts, Ichimoku, Double Top as well as the Aroon
Indicator. As so there is lots of different chart patterns. And exactly how to calculate
it. You also get a free spreadsheet available with the book. OK, so what is the strategy?
Well it is very simple, in all my videos, I like to present quite a simple strategy,
run over a relatively long period of time. This isn’t a complete trading strategy, any
person including myself, if I was to trade this strategy would want to refine it, to
tweak it. And make sure that I was fully happy with the strategy. But what I’m doing here
is: Buy when the Closing Price is above the 200 Exponential Moving Average. And the Aroon
Long crosses above 30. So if you can remember from the Aroon chart crossing above 30 means
that the Aroon is coming from a point of weakness, to a period of greater strength. Sell in exactly
the opposite scenario, when the close is below the 200 EMA and the Aroon short line crosses
above the 30 line. We are also going to use the Aroon as a closing system as well. So
we are going to close a buy when the Aroon long closes above 70. So we’re looking at
a time when price has been strong but is weakening. And equally the opposite situation, closing
the Sell, when the Aroon short line crosses below the 70 line. OK, so we are going to
calculate it today using this spreadsheet here. Which is an example of one of the Excel
spreadsheets that are available on my website. Also I do have another eBook available in
the Amazon Kindle Store. And there are links on the screen if you would like more information
about this. So here we have the price data, we are using the S&P 500 from 2000 to the
start of 2015, January 2015. And these are the calculations for the Aroon here. And also
we have the EMA. If I scroll down, we can see that the trade logic is in here, which
I am using to show exactly what I just said. Trade Long when the price is above the EMA
and Aroon moves from below 30 to above 30. I’ve got the trade closing logic and we can
see here that the spreadsheet is going to record our Profit and Loss. OK, so this is
the results of the strategy. I’m starting with a notional $100,000. I’m using a spread
charge here. A charge for trading per trade. And I’m using a profit and loss, sorry a profit
target and a stop-loss based on the ATR. OK, so for the first one I’m using a very high
profit target and stop-loss. So I’m basically testing these strategies without any profit
target or stop-loss or trailing stop. We can see over here that the strategy performs pretty
well. We’ve got from 100,000 we go up to 180,000. If you are familiar with the S&P over this
time we go up from just under 1500 to just over 2000. So we’ve got a gain there that
is something just over what you would have got with a buy-and-hold strategy. Of course
in this strategy we are taking profits when the market rises and when it falls as well.
Obviously this is an advantage if the market spends a long period of time in a bear market.
The strategy works pretty nicely here, we’ve got a relatively low drawdown. Which is always
nice. We’ve got a largest winning trade, much higher than our largest losing trade. We’ve
got a good win percentage here. 57%. A good profit factor, which is the value of the winning
trades divided by the losing trades. Over here we have the different inputs into the
strategy. That we can tweak and change to see how it affects the strategy. One thing
we could always do, is we could put in a stop-loss so if I change this here to 10, it has no
affect. If I change it to 5, there we’re starting to have an affect on our net profit and profit
factor. I can change the profit target, say to 20. We can look at what affect a trailing
stop would have. A fairly small affect. We can look at changing the criteria for the
strategy so instead of 70 I can try 50 and there we can see, we can actually get a slightly
improved profitability. We can change the entry level from 30 to 50 as well. We can
see again there that we are having a slight affect on the strategy. What a lot of people
do today is they don’t use fully invested strategies. They use leverage, because it
is available using CFDs and other types of instruments. Futures markets. So we can simulate
the affect of increasing the leverage. We can see that this has quite a significant
affect on the strategy. But as always with leverage, the key is to look at the drawdown.
We are getting over double the amount of profit but a greater drawdown. If I put this up to
3. What keeps happening is we keep having a greater level of drawdown, equally a greater
level of profitability. So with this strategy here, in its basic form it is a good profitable
strategy. It works well when the market is declining. As it was here in the early 2000s.
Here again in the financial crisis, 2008-09. We can see that the strategy performed pretty
well during all of that period. Much lower drawdown than the underlying market as well.
So overall, we’ve got a pretty nice strategy using the Aroon. It’s a breakout type system,
and it uses the Aroon indicator itself to hold onto, lock-in, as much as those profits
as possible. We trade long and short, so we take advantage of market moves to the downside.
And to me it looks like a pretty decent strategy over that time period. So if you would like
more information about trading using Excel. About the financial market and economics.
Please go to www.Tradinformed.com

7 thoughts on “What is the Aroon Indicator and how can I use it to make money trading the S&P500?”

  1. Hi Mark, I am new to this technical world. First of all thanks for posting the video.Being begineer I have one question for you if you can assist. What period you set in the Aroon (usually it is 14 by default correct?). As I am trying to make sense with historical charts but not sure what I am doing wrong. I am looking at the daily chart of a scrip alongwith 200 EMA. Please advise. Thanks a ton.

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