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Technical indicators - Aroon, ATR, CMO, ADX

technical indicators
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    Technical indicators - Aroon, ATR, CMO, ADX

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    This is a technical indicator developed 10 years ago and can be used to find out if a stock is trending and how strong the trend is. It has also been designed to show the beginning of a new trend. It consists of two lines, upper aroon and lower aroon.

    It uses mainly just one parameter – time periods. Upper Aroon line is the amount percentage of time between the start of a time period and the point at which the highest price during that period occured. If a stock make a new low of the given time period, then the Upper Aroon will be 0. But if the stock closes higher than during the rest of the given time period, Upper Aroon will be +100. During every period without a new high, Upper Aroon moves down according to this little forumla – (1/number of periods)*100.

    The main formula for Upper Aroon is  [ [ (number of periods) - (number of periods since highest high during given time period) ] / (number of periods) ] x 100. Lower Aroon is calculated the same way only switch the highest high with a lowest low.

    Aroon cases

    • If Upper Aroon and Lower Aroon are moving lower in are close by to each other, it means that no strong trend is apparent.
    • If upper Aroon slightly goes below 50, it is an indication that the current uptrend has lost its momentum. Vice versa in case of Lower Aroon.
    • If value in case of either Aroon is above 70 then it indicates strong trend, direction depends on which Aroon is above 70. If Upper then uptrend, if lower then downtrend.
    • If value in case of either Aroon is below 30, it is an indication that strong trend in the opposite direction is coming. So sign of possible reversal.

    Aroon oscillator

    This is generated by subtracting Lower Aroon from Upper Aroon. And the Aroon Oscillator has always a value between -100 and 100.

    If it’s above zero, it is an indication of an upcoming upwards trend. And if below zero, it’s an indication of upcoming downwards trend. And the bigger or smaller the value of the Aroon Oscillator is, the stronger the upcoming trend will be.

    Average True Range (ATR)
    It’s a measure of volatility. It’s used as one component in many other technical indicators.

    There are different ways to calculate ATR – for example from today’s high to today’s low, from yesterday’s close to today’s high or low. Usually ATR is a 14-day moving average of the true ranges.

    High ATR values are often visible in market bottoms. Low ATR values are often visible during extended sideways periods in market tops.

    Chande Momentum Oscillator (CMO)
    It is similar to relative strength index in this oscillator short term price changes are not hidden, data used for caluclations has not been smoothed. The scale is -100 to 100.

    CMO can be used to

    • Find oversold and overbought areas. Overbought level appears above or equal to 50 and oversold below or equal to -50.

    • Find entry and exit point if used together with am oving average. For example 20-day CMO and 9-day moving average. When CMO crosses above the moving average, it’s a Buy signal. Sell when CMO crosses below it.

    • Find sideways movement. In case of low CMO values (near to 0) is condiered a sideways movement

      De-trended Price Oscillator (DPO)
      This oscillator tries to make it more easy to find overbought & oversold levels by eliminating the trend in prices.

      Directional system (ADX)
      Directional system defines the tendency in which way the prices are moving and also how fast it moves. It traces changes in mass optimism and pessimism. When ADX raises, it means that the market tendency is getting stronger and it’s suggestable to only make trades in the direction of the tendency. When it falls, then you should probably stay away.

      Don’t worry if you don’t know how to calculate all of them, the caluclations are done for you in your chosen trading/charting platforms. You just need to know what certain indicators can do.

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