Aroon Indicator: Formula, Calculations, Interpretation, Limits

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Aroon Indicator: Formula, Calculations, Interpretation, Limits

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What Is the Aroon Indicator?

The Aroon indicator is a technical indicator that is used to identify trend changes in the price of an asset, as well as the strength of that trend. In essence, the indicator measures the time between highs and the time between lows over a time period. The idea is that strong uptrends will regularly see new highs, and strong downtrends will regularly see new lows. The indicator signals when this is happening, and when it isn’t.

The indicator consists of the “Aroon up” line, which measures the strength of the uptrend, and the “Aroon down” line, which measures the strength of the downtrend.

The Aroon indicator was developed by Tushar Chande in 1995.

Key Takeaways

  • The Aroon indicator is composed of two lines. An up line which measures the number of periods since a High, and a down line which measures the number of periods since a Low.
  • The indicator is typically applied to 25 periods of data, so the indicator is showing how many periods it has been since a 25-period high or low.
  • When the Aroon Up is above the Aroon Down, it indicates bullish price behavior.
  • When the Aroon Down is above the Aroon Up, it signals bearish price behavior.
  • Crossovers of the two lines can signal trend changes. For example, when Aroon Up crosses above Aroon Down it may mean a new uptrend is starting.
  • The indicator moves between zero and 100. A reading above 50 means that a high/low (whichever line is above 50) was seen within the last 12 periods.
  • A reading below 50 means that the high/low was seen within the 13 periods.
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Formulas for the Aroon Indicator


Aroon Up = 2 5 Periods Since 25 period High 2 5 1 0 0 Aroon Down = 2 5 Periods Since 25 period Low 2 5 1 0 0 \begin{aligned} \text{Aroon Up}&= \frac{25-\text{Periods Since 25 period High}}{25} \ast100\\ \text{Aroon Down}&=\frac{25-\text{Periods Since 25 period Low}}{25}\ast100 \end{aligned}
Aroon UpAroon Down=2525Periods Since 25 period High100=2525Periods Since 25 period Low100

How to Calculate the Aroon Indicator

The Aroon calculation requires the tracking of the high and low prices, typically over 25 periods.

  1. Track the highs and lows for the last 25 periods on an asset.
  2. Note the number of periods since the last high and low.
  3. Plug these numbers into the Up and Down Aroon formulas.

What Does the Aroon Indicator Tell You?

The Aroon Up and the Aroon Down lines fluctuate between zero and 100, with values close to 100 indicating a strong trend and values near zero indicating a weak trend. The lower the Aroon Up, the weaker the uptrend and the stronger the downtrend, and vice versa. The main assumption underlying this indicator is that a stock’s price will close regularly at new highs during an uptrend, and regularly make new lows in a downtrend.

The indicator focuses on the last 25 periods, but is scaled to zero and 100. Therefore, an Aroon Up reading above 50 means the price made a new high within the last 12.5 periods. A reading near 100 means a high was seen very recently. The same concepts apply to the Down Aroon. When it is above 50, a low was witnessed within the 12.5 periods. A Down reading near 100 means a low was seen very recently.

Crossovers can signal entry or exit points. Up crossing above Down can be a signal to buy. Down crossing below Up may be a signal to sell.

When both indicators are below 50 it can signal that the price is consolidating. New highs or lows are not being created. Traders can watch for breakouts as well as the next Aroon crossover to signal which direction price is going.

Example of How to Use the Aroon Indicator

The following chart shows an example of the Aroon indicator and how it can be interpreted.

Image by Sabrina Jiang © Investopedia 2020

In the chart above, there is both the Aroon indicator and an oscillator that combines both lines into a single reading of between 100 and -100. The crossover of the Aroon Up and Aroon Down indicated a reversal in the trend. While the index was trending, prior to the reversal, the Aroon Down remained very low, suggesting that the index had a bullish bias. Despite the rally on the far right, the Aroon indicator hasn’t shown a bullish bias yet. This is because the price rebounded so quickly that it hasn’t made a new high in the last 25 periods (at the time of the screenshot), despite the rally.

The Difference Between the Aroon Indicator and the Directional Movement Index (DMI)

The Aroon indicator is similar to the Directional Movement Index (DMI) developed by Welles Wilder. It too uses up and down lines to show the direction of a trend. The main difference is that the Aroon indicator formulas are primarily focused on the amount of time between highs and lows. The DMI measures the price difference between current highs/lows and prior highs/lows. Therefore, the main factor in the DMI is price, and not time.

Limitations of Using the Aroon Indicator

The Aroon indicator may at times signal a good entry or exit, but other times it will provide poor or false signals. The buy or sell signal may occur too late, after a substantial price move has already occurred. This happens because the indicator is looking backwards, and isn’t predictive in nature.

A crossover may look good on the indicator, but that doesn’t mean the price will necessarily make a big move. The indicator isn’t factoring the size of moves, it only cares about the number of days since a high or low. Even if the price is relatively flat, crossovers will occur as eventually a new high or low will be made within the last 25 periods. Traders still need to use price analysis, and potentially other indicators, to make informed trading decisions. Relying solely on one indicator isn’t advised.

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Accumulation Phase

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Accumulation Phase

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What Is the Accumulation Phase?

Accumulation phase has two meanings for investors and those saving for retirement. It refers to the period when an individual is working and planning and ultimately building up the value of their investment through savings. The accumulation phase is then followed by the distribution phase, in which retirees begin accessing and using their funds.

Key Takeaways

  • Accumulation phase refers to the period in a person’s life in which they are saving for retirement.
  • The accumulation happens ahead of the distribution phase when they are retired and spending the money.
  • Accumulation phase also refers to a period when an annuity investor is beginning to build up the cash value of the annuity. (The annuitization phase, when payments are dispersed, follows the accumulation period.)
  • The length of the accumulation phase will vary based on when an individual begins saving and when the person plans to retire.

How the Accumulation Phase Works

The accumulation phase is also a specific period when an annuity investor is in the early stages of building up the cash value of the annuity. This building phase is followed by the annuitization phase, where payments are paid out to the annuitant.

The accumulation phase essentially begins when a person starts saving money for retirement and ends when they begin taking distributions. For many people, this starts when they begin their working life and ends when they retire from the work world. It is possible to start saving for retirement even before beginning the work phase of one’s life, such as when someone is a student, but it is not common. Typically, joining the workforce coincides with the start of the accumulation phase.

Importance of the Accumulation Phase

Experts state that the sooner an individual begins the accumulation phase, the better, with the long-term financial difference between beginning to save in one’s 20s vs. in the 30s substantial. Postponing consumption by saving during an accumulation period will most often increase the amount of consumption one will be able to have later. The earlier the accumulation period is in your life, the more advantages you will have, such as compounding interest and protection from business cycles.

In terms of annuities, when a person invests money in an annuity to provide income for retirement, they are at the accumulation period of the annuity’s life span. The more invested during the accumulation phase, the more will be received during the annuitization phase.

Real-World Examples

There are many income streams that an individual can build up during the accumulation phase, starting from when they first enter the workforce, or in some cases, sooner. Here are a few of the more popular options.

  • Social Security: This is a contribution automatically deducted from every paycheck you receive.
  • 401(k): This is an optional tax-deferred investment that can be made paycheck-to-paycheck, monthly, or yearly provided your employer offers such an option. The amount you can set aside has yearly limits and also depends on your income, age, and marital status.
  • IRAs: An Individual Retirement Account can be either pretax or after-tax, depending on which option you choose. The amount you can invest varies year-to-year, as set out by the Internal Revenue Service (IRS), and depends on your income, age, and marital status.
  • Investment portfolio: This refers to an investor’s holdings, which can include assets such as stocks, government, and corporate bonds, Treasury bills, real estate investment trusts (REITs), exchange-traded funds (ETFs), mutual funds, and certificates of deposits. Options, derivatives and physical commodities like real estate, land and timber can also be included in the list.
  • Deferred payment annuities: These annuities offer tax-deferred growth at a fixed or variable rate of return. They allow individuals to make monthly or lump-sum payments to an insurance company in exchange for guaranteed income down the line, typically 10 years or more.
  • Life insurance policies: Some policies can be useful for retirement, such as if an individual pays an after-tax, fixed amount annually that grows based on a particular market index. The policy would need to be the kind that allows the individual to withdraw in retirement the principal and any appreciation from the policy essentially tax-free.

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Absolute Return: Definition, Example, Vs. Relative Return

Written by admin. Posted in A, Financial Terms Dictionary

Absolute Return: Definition, Example, Vs. Relative Return

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What Is Absolute Return?

Absolute return is the return that an asset achieves over a specified period. This measure looks at the appreciation or depreciation, expressed as a percentage, that an asset, such as a stock or a mutual fund, achieves over a given period.

Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.

Key Takeaways

  • Absolute return is the return that an asset achieves over a certain period.
  • Returns can be positive or negative and may be considered unrelated to other market activities.
  • Absolute return, unlike relative return, does not make any comparison against other possible investments or to a benchmark.

How Absolute Return Works

Absolute return refers to the amount of funds that an investment has earned. Also referred to as the total return, the absolute return measures the gain or loss experienced by an asset or portfolio independent of any benchmark or other standard. Returns can be positive or negative and may be considered uncorrelated to other market activities.

Relative and Absolute Returns

In general, a mutual fund seeks to produce returns that are better than its peers, its fund category, and the market as a whole. This type of fund management is referred to as a relative return approach to fund investing. The success of the asset is often based on a comparison to a chosen benchmark, industry standard, or overall market performance.

As an investment vehicle, an absolute return fund seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds. Absolute return investment strategies include using short selling, futures, options, derivatives, arbitrage, leverage, and unconventional assets. Absolute returns are examined separately from any other performance measure, so only gains or losses on the investment are considered.

The History of Absolute Return Funds

Alfred Winslow Jones is credited with forming the first absolute return fund in New York in 1949. In recent years, the absolute return approach to fund investing has become one of the fastest-growing investment products in the world and is more commonly referred to as a hedge fund.

Hedge Funds

A hedge fund is not a specific form of investment; it is an investment structured as a pool and set up as either a limited partnership or limited liability company (LLC). A hedge fund manager raises funds by working with outside investors. The manager uses the funds to invest based on a declared strategy involving only the purchase of long equities, such as common stock.

Hedge funds may specialize in specific areas, such as real estate or patents, and may also engage in private equity activities. While anyone may invest in a hedge fund, participants are traditionally accredited and sophisticated investors.

Example of Absolute Return

As a historical example, the Vanguard 500 Index ETF (VOO) delivered an absolute return of 150.15% over the 10-year period ending Dec. 31, 2017. This differed from its 10-year annualized return of 8.37% over the same period. Further, because the S&P 500 Index had an absolute return of 153.07% over the same period, absolute return differed from the relative return, which was -2.92%. 

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