S&C - A Time Price Oscillator (Aroon) PDF

Stocks & Commodities V13 (369-374): The Time Price Oscillator by Tushar S.
Chande
INDICATORS
A Time Price Oscillator
Technical indicators, and oscillators in particular, measure the behavior of price

relative to time. For example, the rate of change oscillator calculates the
percentage change in price over a set period. That said, now consider an
indicator that reverses the roles of price to time and measures the passage of time
relative to price. This article details such an indicator, presenting numerous
applications.
by Tushar Chande, Ph.D.
ll major price trends evolve, both in price and time. A market trading in a sideways trend may begin to advance,
turning into an upward trend, forming a series of higher highs and higher lows. Over time the uptrend will mature
and move into a sideways trend again, ultimately forming a market top, and then a downward trend will emerge.
This new trend, led by lower lows and lower highs, will reach a market bottom and form another sideways trend.
During each phase of the trend, money can be made by simply following the trend or by anticipating price changes
about a trend. For example, you can design a trend-following method to establish positions in accordance with the
major trend. However, you can also use a trading range method, buying at the lower side of a trading range and
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V13 (369-374): The Time Price Oscillator by Tushar S. Chande
selling at the upper side. This would be considered an antitrend philosophy.

The key question is: When is the best time to do either? At what point during a market cycle should you expect a
trend to begin or end, and when can you accurately estimate that the direction has changed?
You can count on the markets changing direction, just as you can count on day following the night. Like the sun,
trends emerge, rise to a peak, weaken and fade away. In Sanskrit, aroon is the word for dawn's early light, the first
sign of a new day or a change from night to day. Thus, "aroon" is an apt name for an indicator that is sensitive to the
beginning of a new trend. This new indicator combines price and time in a way that illuminates the evolution of the
price trend, and you can use it to identify periods when trend-following or antitrend strategies are likely to succeed.
THE BASICS OF AROON

The simplest definition of an uptrend is a series of higher highs and higher lows. Similarly, the definition of a
downtrend is a series of lower lows and lower highs. However, within this definition, prices can evolve in any of a
number of ways. The distinct manner in which a trend moves can include a combination of price relationships; for
example, traders often compare today's price to some price in the past, such as today's high to a high a number of
days ago. Overlooked in this process is the passage of time as a measurable component of the picture. Hence, we can
ask this question: How many days have passed since the most recent x -day high or most recent x -day low?
To answer the question in trading terms, we can use a breakout criterion and use a fixed period for reference. Say we
arbitrarily pick 25 days as our reference period, since this number roughly corresponds to one month of data. We can
now define a trend as consisting of a series of higher 25-day highs and higher 25-day lows, or as a series of lower
25-day lows and lower 25-day highs. All that remains is to ask how much time has passed since the most recent
25-day high or low.
Consider a market that has made a new 25-day high as of today. In this case, the number of days since the most
recent high is zero. Assume that the market has been in a steady uptrend. In this case, it is possible that the number
of days since the last 25-day low is 25. Hence, we can quantify this trend on a time scale as follows:
Aroonup = 100((Refperiod - #Days Since High)/Refperiod )
Aroondn = 100((Refperiod - #Days Since Low)/Refperiod )
If we pick 25 days as the reference period (Refperiod ), then
Aroonup =100((25 - #Days Since 25-day High)/25)
Aroondn = 100((25 - #Days Since 25-day Low)/25)
When the market makes a new 25-day high, aroonup = 100; when the market makes a new 25-day low, aroondn
= 100. When the market has not made a new high for 25 days, aroonup = zero, and when the market has not made
a new low for 25 days, aroondn = zero.
The formulas for SuperCharts are:
Remember that the 25-day period was chosen arbitrarily; you can choose any period. We can also define an oscillator
simply by taking the difference between the uptrend and downtrend numbers,
Aroonosc = Aroonup - Aroondn
USING AROON
When you plot aroonup and aroondn in an indicator window below the price chart, you can recognize patterns.
The first guideline is the trend shown by the component that has most recently reached a value of 100. For example,
in Figure 1, we see the 1995 rally in the interest rates instruments using the June 1995 10-year Treasury note futures
contract. The market bottomed in fall 1994 and has rallied since December 1994. In the indicators plotted below the
price bars, the darker line is aroonup and the lighter line is aroondn . Aroonup first clicked to 100 in late
November, signaling a possible change in trend. The market then made a few 25-day new highs before entering a
consolidation period in December. During this time, no new 25-day highs or lows were made; hence, the aroonup
line trended lower, toward zero. Aroonup and aroondn moved lower in parallel fashion.
109
108
107
During the uptrend, the

Aroonup line remained
above the Aroondn line
106
105
104
103
Aroonup hit 100,

indicating possible
trend change
102
101
100
Aroonup
Parallel downward
movement
indicates a
consolidation
99
Bullish signal
100
90
80
70
60
50
40
30
20
10
Bearish
crossover
D
95
FIGURE 1: JUNE 1995 10-YEAR T-NOTE. The first indication of strength occurred when the aroonup line
hit 100 in December. Then during the consolidation, both the aroonup and the aroondn lines moved to zero. Next,
the aroonup line hit 100 in January and stayed persistently between 70 and 100, indicating a bull trend.
This pattern always signals a consolidation. In addition, the market never made new 25-day lows and as such,
aroondn never reached 100, an indication that no significant selling occurred in the market during this
consolidation. However, it appeared that in early January 1995, the market was about to form new 25-day lows as
the aroondn line crossed over and above the aroonup line. The aroondn line appeared to be headed for 100. But
the market rallied to a new 25-day high, signaled by the aroonup line crossing over the aroondn line and moving to
a value of 100. This was the real breakout, and prices moved higher. As expected, the aroonup line has remained
above aroondn throughout the rally.
During the consolidations, the market never made new 25-day lows, and breakouts to new highs with aroondn near
zero were good short-term trades. You can see this same pattern in Figure 2, a closeup of the April to May trading
period of the June 1995 Treasury note. The price surged above the 106-08 area after a brief consolidation, and
simultaneously, the aroondn line was below 30. Note that consolidations are marked by parallel lines forming
between aroonup and aroondn . You can observe the same scenario in the June 1995 yen futures contract (Figure
3), when in February, after a brief consolidation marked by parallel lines of aroonup and aroondn , it broke out
decisively with aroondn near 30.
FIGURE 2: JUNE 1995 10-YEAR T-NOTE. Here's an example of a successful upside breakout with the
aroon up line moving to 100.
FIGURE 3: JUNE 1995 YEN, UPSIDE BREAKOUT. Here's another example of an upside breakout with
the aroon dn line below 30.
MORE PATTERNS
During consolidations, sharp market moves often occur after aroonup declines below 50. You can see an example
of this in the June 1995 yen contract (Figure 4), where a decline of aroonup below 50 preceded a breakdown below
the 119.00 level. The same pattern occurred in the June 1995 COMEX gold contract (Figure 5); here, the market
broke sharply a few days after the aroonup indicator had declined below 50. A value of 50 for the aroonup
indicator simply means that 13 days have passed since the most recent 25-day high, which indicates a loss of upside
momentum.
FIGURE 4: JUNE 1995 YEN, FOREWARNING A DECLINE. If the market has been in an uptrend, a
decline may be forewarned by the aroon up line declining below 50, as it did here in early May.
FIGURE 5: JUNE 1995 GOLD. Each time the aroon up line dropped below a reading of 50, the price of gold
fell.
The direction of the next trend change can be deduced when the aroondn and aroonup lines descend from left to
right parallel to one other. The probable direction is in the direction of the lower line. In Figure 6, you can see the
June 1995 Canadian dollar contract. During the downtrend, the aroondn line was above the aroonup line. Then the
Canadian dollar bottomed and retested the lows. While the market bottom formed, the two aroon lines wavered back
and forth. During the second test of the lows, the aroon lines descended from left to right, forming two closely
spaced parallel lines. The aroon up line was below the aroondn line, suggesting that the next crossover would be a
breakout to the upside. The crossover occurred in early April, near the 71.00 level, and the Canadian dollar moved
steadily toward the prior highs. Note again that good breakouts occur when the two lines are far apart, in this case
with aroondn below 30.
FIGURE 6: JUNE 1995 CANADIAN DOLLAR. During March 1995, the aroon up line fell in parallel
step with the aroon dn line. The crossover of the aroon up line above the aroon dn line signaled a market
advance.
The aroon oscillator (aroonosc ), which is the difference between the aroonup and the aroondn , can be used to
"meter" the trend strength as well as trade. Returning to the June 1995 gold contract, which was trading in choppy
fashion tracing wide swings, the aroonosc showed the strength of the trend on a scale of +100 to -100 (Figure 7),
and its zero crossover gave good signals for buys and sells.
FIGURE 7: AROONOSC AND JUNE 1995 GOLD. The oscillator can indicate overbought and oversold
market conditions. Crossovers at the zero level can be used to indicate changes in market direction.
AN ECLIPSE
If you choose, you can fade a market when either aroonup or aroondn is in the 100 area. Use good risk control
and limit your losses with this strategy, since the trend may not necessarily falter but could continue in a dramatic
fashion. Having said that, this strategy would have picked the tops and bottoms in the July 1995 coffee futures
contract quite nicely (Figure 8). This strategy is usually early, and you should be ready to reverse to a
trend-following position if needed. You could use a separate indicator to determine a trend or anti-trend phase in the
market. If the market is trending, then do not fade the trend, and if the market is in a trading range, then fade the
trend. This approach is illustrated with the December 1992 high-grade copper futures contract in Figure 9. My other
indicators indicated a trend during June, July and August, and then a trading range formed. You could have picked
the top and bottom very accurately with the additional risk of resisting the downtrend at two points.
FIGURE 8: JULY 1995 COFFEE. During trading ranges, a reading of 100 by the aroon up line and the
aroon dn line can signal overbought and oversold situations.
FIGURE 9: DECEMBER 1992 COPPER. The market entered into a trading range in August, therefore a sell
signal based on the aroon up line moving to 100 was warranted.
You can use aroon to focus on the long-term trend. The August 1982 soybeans contract (Figure 10) was in a
sideways pattern in May. No sooner had aroonup declined below 50% that a significant downtrend began around
the 675 level. It continued in a choppy style all the way down to the 550 area, a megaprofit opportunity. At no time
during this decline did aroonup climb above 50. Thus, just by observing the pattern of the two lines, you can keep
aligned with the major trend.
FIGURE 10: AUGUST 1982 SOYBEANS. During May, the aroon up declined below 50, forewarning of
an emerging bear market.
The same principle can be seen in a shorter time frame using the March 1979 cotton contract (Figure 11). A major top
was forming near the 73 area, but it seemed ambiguous. The return rally from a price of 69.00 cents during
November had exceeded all retracement targets. However, once the two aroon lines crossed, they never crossed
again, and the aroonup line stayed below 50. Thus, if the trend is down, observe the aroonup line for clues, and if
the trend is up, observe the aroondn line for clues.
FIGURE 11: MARCH 1979 COTTON. Once the aroon up line crossed below the aroon dn line, the
market traced out a series of lower lows and lower highs.
The choppy trading action that occurred for the March 1991 Deutschemark futures contract (Figure 12) shows the
same patterns. Note how sharp selloffs occurred after aroonup had crossed below 50. In choppy markets, the
crossovers of the two lines, and their movement below 50, seem to lead to swing moves. Note how the rapid rise
after the aroondn line declined below 50. Thus, the 12- to 13-day period after forming a new high or low often
leads to short-term trading moves.
FIGURE 12: MARCH 1991 DEUTSCHEMARK. A decline below 50 by the aroon up line was followed
by a selloff in the market.
A trader would be well served by keeping an eye on aroon, since it signals breakouts. A breakout represents a
sudden shift in market fundamentals that may evolve into a big move. Nothing proves this better than the March
1990 orange juice contract (Figure 13). The market had been trending lower into late November 1989. The aroondn
line was bouncing between 70-100, while the aroonup line was below 20. It had all the signs of an orderly decline.
Yet, overnight, the market gapped upward, and aroonup leaped from 8% to 100%. The aroondn line just barely
edged lower.
FIGURE 13: MARCH 1990 ORANGE JUICE. During late November 1989, the price of orange juiced
gapped up on the chart and aroon up jumped to 100. The aroon dn then fell below 50, indicating an emerging
uptrend.
What did this mean? Was it a one-day wonder or was it actually a market shift? For the next eight days, the market
traded choppily, filling the gap. Yet the aroondn line declined below 50%, indicating that a real market shift was
under way. This occurred at the 127 area during the first week in December. Clearly, a trader had at least eight days
to do something about this potential change. The decline in aroondn below 50 flagged a strong rally. Just 31 trading
days later, the orange juice contract was above 200, a move that would have made your mouth water (Figure 14).
FIGURE 14: MARCH 1990 ORANGE JUICE. After the signal detailed in Figure 13, the market traded
much higher. The aroon up line stayed near 100, while the aroon dn line rested near zero during the rally.
CONCLUSION
Aroon measures how many days have passed since an x -day high or low. During trends, it measures 100, when
new x -day highs or lows are being made. During consolidations, it decreases toward zero when x -days have
passed without making a new x -day high or low. The uptrend and downtrend lines make useful patterns when they
move parallel to one another, indicating a consolidation, and with the crossover of the two lines suggesting future
price direction. Sharp corrections tend to occur after 13 days have passed, when aroon values are below 50. The
aroon oscillator can provide useful insight into the price plus time evolution of a trend and can be used to trade with
the trend, or against it.
Tushar Chande is a Contributing Editor for STOCKS & COMMODITIES and holds a doctorate in engineering from
the University of Illinois and a master's degree in business administration from the University of Pittsburgh.
RESOURCES, READING
Chande, Tushar [1995]. "A market bottom pattern for S&P futures," Technical Analysis of STOCKS &
COMMODITIES, Volume 13: March.
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Stocks & Commodities V13 (369-374): The Time Price Oscillator by Tushar S.

A Time Price Oscillator

Technical indicators, and oscillators in particular, measure the behavior of price

selling at the upper side. This would be considered an antitrend philosophy.

THE BASICS OF AROON

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

During the uptrend, the

Aroonup hit 100,

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

Copyright (c) Technical Analysis Inc.

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