The crypto community is regularly talking about increasing or decreasing trends in digital assets, which are difficult to predict due to high volatility. Throughout the year, with varying success after December 2017, the market continues to be bearish, a factor which lowered the price of Bitcoin from $21,000 to $6,000. It is challenging to predict the upcoming trends when crypto assets go up or down. This is done using technical analysis with indicators that are taken from fiat trading.
The cryptocurrency industry is used to separating itself from the traditional economic system and ignoring many laws, practices, and methods that successfully operate in the world familiar to all of us. This is not surprising, because digital assets are excessively dynamic and atypical in complying with the established norms of the financial system. Traders use technical analysis adopted from fiat trading to work on the exchange with indicators for measuring assets and their actions.
We have already talked about the most frequently used indicators in crypto trading, among them are volume, zigzag, RSI, moving averages, MACD, CCI, ADC, and DI. Exchange players regularly use these indicators. But, like all indicators of technical analysis, they do not reflect reality by 100% and show only what has already happened. Therefore, crypto traders are constantly experimenting and using other various indicators for more accurate analysis.
Not so long ago, they started using the Aroon system of indicators from the classical technical analysis “for fun.” In fiat trading, the popularity of Aroon can be compared to the aforementioned known MACD or Stochastic Oscillator. Now the indicator has reached the cryptocurrency industry and helped one of the Medium columnists predict the long-term trend for Bitcoin and increase the value of their portfolio.
Understanding the Aroon Indicator
In 1995, after trading for a while, American engineer of Indian origin Tushar Chande invented the Aroon indicator for more convenient calculation of upcoming indicators. The name was taken from Sanskrit and translated as “the early light of dawn.” As conceived by Chande, this indicator should signal the point where the trend started and its termination.
Knowledge of the strength of the current trend gives the analyst an advantage and empowers them to predict the price increase or decrease in the relatively long run. For example, if a pattern is not observed and the market or financial instrument is in the bidding stage, analytics with the help of Aroon can prevent one from taking actions at a time when the fate of the instrument is less predictable.
How Aroon Works
The entire complex Aroon technical indicator consists of two periodically intersecting lines and an oscillator that displays the interaction of these lines. The baseline pair includes the upper Aroon, Aroon Up, and the lower Aroon, Aroon Down. There is also an oscillator, or an indicator that shows the difference between the lines within a relatively narrow market corridor.
Consider the chart of the BTCUSD trading pair as of November 14, 2018. The presented data is taken from TradingView, wherein a consecutive transition in the sections “Graph,” “Indicators and strategies,” “Embedded,” “Aroon,” there will be two broken or triangular lines, which, unlike smoothed sinusoidal ones, are convenient for use in calculating the indicator. In this image, the orange line is Aroon Up, when the appreciation of the cryptocurrency begins; the blue line is Aroon Down, and it characterizes the reduction in value.
To calculate all three values (Aroon Up, Aroon Down, and the oscillator), only one parameter is needed, and that is the calculation period. The orange line Aroon Up displays the number of days from the beginning of the period to the absolute maximum in the period. The value of Aroon Up is measured relatively; the maximum value is 100. November 14, 2018, as can be seen on the graph, the indicator reached the highest indicators several times.
Aroon Up can be calculated by the established formula, in which:
N is the indicator period;
H is the number of days after the absolute maximum in this period.
For example, when analyzing with a period of 10 days, the value of Aroon Up would be (1-1)/10)100=90, if two days ago, ((10-2)/10)100=80, and so on.
The principle of calculation of Aroon Down is similar to the ascending Aroon. The only thing is to take the number of past days from the absolute maximum, and not the maximum in the period. For this, there is a formula:
The Aroon Oscillator is calculated by subtracting Aroon Down from Aroon Up. Upper and lower Aroons can only take values from 0 to 100, and the oscillator can range from -100 to +100.
Conclusions Drawn from the Calculations of the Indicator
After the calculations, the indicators will produce the following signals with ranges, based on which it will be possible to draw conclusions about the trend.
A blue line in the range from 70 to 100 is a signal of the presence of a strong uptrend;
From 50 to 70 means there is no strong trend, but the potential for development is still large;
From 30 to 50 means the uptrend ends;
From 0 to 30 means there is no uptrend.
For the downtrend, the same indicators remain as for the uptrend: from 70 to 100, from 50 to 70, from 30 to 50, from 0 to 30. In this case, the orange line is taken for analysis.
Therefore, in the presence or absence of both trends, when the indicators will be above 70 or below 30, there is no real trend. Probably, at this point, there is a flat in the market, a period when the price of an asset does not rise or fall, or there is a period of a protracted reversal of an older trend.
If both Aroon Up and Aroon Down lines are below 50, then no tendency for changes is foreseen. In this case, it is more profitable for traders to use flat tactics.
If both lines intersect in figures above 50, there is a change of trends, and therefore, there is a chance to open a bargain at one of the most favorable prices.
If there is an oscillator in the default trading set, then it becomes even easier to draw conclusions on the upcoming trends. The position of the oscillator itself depends on the location of the Aroon Up and Aroon Down. The more the oscillator is above or below the center zero line, the stronger the upward (or downward) trend will be; if the oscillator is at zero, then there is a period of trading, and there is no trend.
Aroon Indicator in Tactics
A crypto trader under the nickname Crypto Otsukimi in his Medium blog tells about the use of Aroon and the fact that the use of this indicator supposedly made it possible to predict trends better. After experimenting with many trading instruments, the exchange player says that he stumbled upon Aroon and did not see previous practical applications for it in cryptocurrencies.
“There are major articles about the indicator, but I did not see Aroon being seriously used in crypto trading. Once someone did it as a joke, they laughed at it. I saw it and wanted to try it. So I began to test a new indicator of technical analysis,” writes Crypto Otsukimi.
The third component is the oscillator, which the trader called the spectrum and compared it with the axis (Z) on the XYZ chart. The introduction of this indicator on the spectrum can determine its strength. As a rule, the higher the Z line on the spectrum, the higher the strength, and vice versa.
The trader advises using the standard for Aroon, which is 14 units: 14 days, 14 hours, and so on because this measurement is the most convenient. “But, of course, you can customize the parameters for yourself. A higher unit should identify trend peaks, while smaller ones can be used for potential scalps,” as stated in the article by Crypto Otsukimi.
The Aroon indicator with its three lines shows crosses, or overlapped price movements that are ready to move up and change the price. Usually, Aroon helps see if a new trend will emerge. Aroon Down Cross speaks of a bearish cross, and Aroon Up Cross speaks of a bullish cross.
Aroon is also suitable for calculating short or long positions. The first chart shows a long position and a cross. As the trader says, the day before entry, you may take “potential” positions (use your own risk management and the application), and the next day after the intersection, the results in the chart would give a return of more than 11%.
The second chart shows a short position. The candle in front of the cross was maintained in trade, but it was still going to cross it. Bringing the bearish cross to short will give a profit of about 19%, as the trader expects.
In general, as the trader demonstrates, by using indicators from the technical analysis that are unusual for cryptocurrency trading, one can calculate the required indicators and get even higher returns on assets.