Welcome to the next Stonehill Forex Indicator Study. This research represents an investigative look into how and why some indicators work and some don’t work as well.
New Versus Old
We are introducing indicators not included with the MT4 platform to find more efficient indicators which may yield superior results than older indicators better suited for different markets.
Our Next Indicator Choice is…
The Aroon Up and Down; also known as the Aroon indicator, is our next confirmation indicator choice. This indicator makes a fine entry and/or exit indicator. The indicator is derived by calculating how many periods since the last 25-period high (or low), subtracting from 25, dividing by 25, then multiplying by 100 and creates a signal when one line crosses over the other. It is available for download free from the indicator page HERE.
Developed by Tushar Chande in 1995, and it was originally designed to determine whether a stock is trending (or not) and how strong the trend is, but it also works well for FOREX currency pairs. Fun fact: “Aroon” means “Dawn’s Early Light” in Sanskrit, and the reference is meant to highlight the indicator’s ability to reveal the beginning of a new trend.
A “confirmation indicator” falls into the category of indicators that serve as an initial checkpoint after the baseline indicator. It is also a “below chart” indicator, which helps keep your price chart free of distractions. These concepts are explained in great detail in the Stonehill Forex Advanced Course HERE.
* Clear signals without confusion
* Designed to determine when a new trend is starting
* Can indicate when price is in a consolidation period
* Reflects the strength of the trend in its appearance
Below is a screenshot of what the indicator looks like on the daily time frame. Note that we’ve changed the color of the candles to white to remove any emotional bias and that only the indicator is prominent.
How We Use It
As a crossover indicator, a signal is indicated when one line crosses over the other. The default colors are blue for up and red for down. Let’s review the highlighted marks on the picture below to understand what they mean.
* Long = Blue crosses over red going up.
* Short = Red crosses over blue going up.
Flat/Narrow = When the trend is either exhausted (over, with a possible reversal imminent) or sideways in a range bound/consolidating market. The two lines come together with little separation between them.
* Widespread = a strong trend is evident as the distance between the Aroon up and Aroon down lines are spaced apart, with the strongest part of the trend placing the lines at their extremes.
CAUTION: the spacing of the signals lines should not be the reason to take action. You would be quite the frantic trader if you initiated/maintained/closed a trade every time the lines converged or diverged. Stick to the signal lines crossing when it comes to trading.
The one setting includes; The number of Periods. The default setting is 14, which controls the number of periods used to calculate the value of the signal. Some versions have an alert function which can be toggled on and off.
Remember, comprehensive analysis is strongly suggested, and we advocate backwards and forward testing indicators or systems prior to trading actual funds. We propose conducting your tests on the following five pairs.
If it doesn’t work on these five pairs, chances are it won’t work on other pairs. This is not an absolute, but we’ve found this rule is reliable in most cases.
Timeframes and Results
In our initial test, we’ll run the Aroon Indicator on the EUR/USD using the default settings; 14, across the daily and 4-hour timeframes on the MT4 strategy tester. We use the fast method of testing the indicator to get a general idea; however, you may also run the tick-by-tick data set for a more precise result (which takes considerably more time).
As No Nonsense Traders – and therefore Swing Traders, we will not examine shorter time frames in these studies. We will run multiple iterations using combinations of the settings to analyze which one works best and examine their results:
ROI (return on investment)
There are other metrics included in the strategy tester report, which can be compared, but these three metrics provide the necessary gauge to make quick decisions as to the usefulness of a particular indicator and its settings.
Next, for comparison, we’ll explore the following;
Daily – 1 year
4-hour – 3 months
The reason exceptionally long (or short) testing periods are not included is due to changing market conditions, which might return irrelevant information. A balance of statistically significant data is necessary for accurate results.
And the Outcome…
Below is a spreadsheet listing the results from our tests.
You can see that the green highlighted rows represent the best settings for that time frame when all the indicator settings have been taken into consideration. Keep in mind that this changes over time and should not be considered specific trading advice.
If you are curious as to what money management is used on our tests; we have a certain way of determining wins and losses, which can be found in the advanced course. Our goal here is to determine how well the indicator reacts to price with respect to producing a long or short signal. Your system, with its risk profile, will dictate individual returns.
As we did with past indicator studies, we’ve made the Bulls Bears Impulse Indicator available for download on our site from the indicator library. We will keep adding better indicators with each study for your use, at no charge. When you’re ready to get it, click HERE.
For more detail about this indicator, check out the article at the Investopedia site; Aroon Oscillator Definition – Technical Analysis
More to Come
There’s a lot more to come. We are excited to provide more trading tips in the near future. Sign up on our contacts page or subscribe to our YouTube channel. Receive early notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to becoming a better trader.
And, now you are aware of another indicator that many traders don’t know or use.
Learn More Here
Want to learn more about where and how to find/test/use better indicators? Check out the Stonehill Forex Advanced Course HERE, for more information.
Our only goal is to make you a better trader.
BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments. It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.