Trading example of the Aroon Indicator on BHP Billiton LTD
Here is a spread betting example using the Aroon Indicator on BHP Billiton. The Aroon indicator is more of a confirmation tool than an entry and exit tool, as it lags the change of Direction. It has a similar behavior to a moving average. Moving averages only tell you that the market has turned, after it has turned. On the other hand the advantage of a lagging indicator is that if a trend pics up it is the best tool to keep you in the trend even if short term retracements arise in the main trend.
Period 14: Having said that lets return to our example. In the Aroon Indicator I have applied this on BHP Billiton, a mining company. I have used the default settings that are given by the graph, that is a period of 14 days. The higher the period, the longer it will keep you in the trend but at the same time the later you will enter the trend.
Trade Short when the Aroon Indicator crosses and turns Red.
Trade Long when the Aroon Indicator crosses and turns Blue.
Pay attention you always want to see one of the Aroon indicator’s leg’s above the 70 line or below the 30. If both are in the middle, or between the 30 and 70 line, this is telling you that there is a lack of direction. Should stay out if your strategy is following the trend.
As you can see from the graph, where the indicator crosses downwards, changing the highlighted colour to red, this indicates a short trend is under way. You can see this highlighted by the first down arrow. As you can see, at this point the trend in BHP Billiton has already reversed and and the Aroon indicator has signalled it slightly late.
On the second up arrow indicates a long trend is underway. You can identify this by the Indicator turning blue in this spread betting example.
Instead where you see the red cross. The Indicator gives no direction as the lines narrow between the 70 and 30 mark.
The Aroon Indicator is a very helpful tool as it tells you in which Market you are trading and which tools to apply, trend following tools like the Moving averages or oscillators.
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