What Is the Aroon Oscillator?

The Aroon Oscillator is a trend-following indicator that uses aspects of the Aroon Indicator (Aroon Up and Aroon Down) to gauge the strength of a current trend and the likelihood that it will continue.

Understanding the Aroon Oscillator

Aroon oscillator readings above zero indicate that an uptrend is present, while readings below zero indicate that a downtrend is present. Traders watch for zero line crossovers to signal potential trend changes. They also watch for big moves, above 50 or below -50 to signal strong price moves.

The Aroon Oscillator was developed by Tushar Chande in 1995 as part of the Aroon Indicator system. Chande’s intention for the system was to highlight short-term trend changes. The name Aroon is derived from the Sanskrit language and roughly translates to “dawn’s early light.”

The Aroon Indicator system includes Aroon Up, Aroon Down, and Aroon Oscillator. The Aroon Up and Aroon Down lines must be calculated first before drawing the Aroon Oscillator. This indicator typically uses a timeframe of 25 periods, however, the timeframe is subjective. Using more periods garners fewer waves and a smoother-looking indicator. Using fewer periods generates more waves and a quicker turnaround in the indicator. The oscillator moves between -100 and 100. A high oscillator value is an indication of an uptrend while a low oscillator value is an indication of a downtrend.

Aroon Up and Aroon Down move between zero and 100. On a scale of zero to 100, the higher the indicator’s value, the stronger the trend. For example, a price reaching new highs one day ago would have an Aroon Up value of 96 ((25-1)/25)x100). Similarly, a price reaching new lows one day ago would have an Aroon Down value of 96 ((25-1)x100).

The highs and lows used in the Aroon Up and Aroon Down calculations help to create an inverse relationship between the two indicators. When the Aroon Up value increases, the Aroon Down value will typically see a decrease and vice versa.

When Aroon Up remains high from consecutive new highs, the oscillator value will be high, following the uptrend. When a security’s price is on a downtrend with many new lows, the Aroon Down value will be higher resulting in a lower oscillator value.

The Aroon Oscillator line can be included with or without the Aroon Up and Aroon Down when viewing a chart. Significant changes in the direction of the Aroon Oscillator can help to identify a new trend.

Aroon Oscillator Formula and Calculation

The formula for the Aroon oscillator is:

$\begin{aligned} &\text{Aroon Oscillator}=\text{Aroon Up}-\text{Aroon Down}\\ &\text{Aroon Up}=100*\frac{\left(25 – \text{Periods Since 25-Period High}\right)}{25}\\ &\text{Aroon Down}=100*\frac{\left(25 – \text{Periods Since 25-Period Low}\right)}{25}\\ \end{aligned}$​Aroon Oscillator=Aroon Up−Aroon DownAroon Up=100∗25(25−Periods Since 25-Period High)​Aroon Down=100∗25(25−Periods Since 25-Period Low)​​

To calculate the Aroon oscillator:

1. Calculate Aroon Up by finding how many periods it has been since the last 25-period high. Subtract this from 25, then divide the result by 25. Multiply by 100.
2. Calculate Aroon Down by finding how many periods it has been since the last 25-period low. Subtract this from 25, then divide the result by 25. Multiply by 100.
3. Subtract Aroon Down from Aroon Up to get the Aroon Oscillator value.
4. Repeat the steps as each time period ends.

Aroon oscillator differs from the rate of change (ROC) indicator in that the former is tracking whether a 25-period high or low occurred more recently while the latter tracks the momentum by looking at highs and lows and how far the current price has moved relative to a price in the past.

Aroon Oscillator Trade Signals

The Aroon Oscillator can generate trade signals or provide insight into the current trend direction of an asset.

When the oscillator moves above the zero line, the Aroon Up is crossing above the Aroon Down and the price has made a high more recently than a low, a sign that an uptrend is beginning.

When the oscillator moves below zero, the Aroon Down is crossing below the Aroon Up. A low occurred more recently than a high, which could signal that a downtrend is starting.

Limitations of Using the Aroon Oscillator

The Aroon Oscillator keeps a trader in a trade when a long-term trend develops. During an uptrend, for example, the price tends to keep achieving new highs which keep the oscillator above zero.

During choppy market conditions, the indicator will provide poor trade signals, as the price and the oscillator whipsaw back and forth.

The indicator may provide trade signals too late to be useful. The price may have already run a significant course before a trade signal develops. The price may be due for a retracement when the trade signal is appearing.

The number of periods is also arbitrary and there is no validity that a more recent high or low within the last 25-periods will guarantee a new and sustained uptrend or downtrend.

The indicator is best used in conjunction with price action analysis fundamentals of long-term trading, and other technical indicators.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

What Is the Accounts Payable Turnover Ratio?

The accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover shows how many times a company pays off its accounts payable during a period.

Accounts payable are short-term debt that a company owes to its suppliers and creditors. The accounts payable turnover ratio shows how efficient a company is at paying its suppliers and short-term debts.

The AP Turnover Ratio Formula


$\begin{aligned} &\text{AP Turnover}=\frac{\text{TSP}}{(\text{BAP + EAP})/2}\\ &\textbf{where:}\\ &\text{AP = Accounts payable}\\ &\text{TSP = Total supply purchases}\\ &\text{BAP = Beginning accounts payable}\\ &\text{EAP = Ending accounts payable}\\ \end{aligned}$​AP Turnover=(BAP + EAP)/2TSP​where:AP = Accounts payableTSP = Total supply purchasesBAP = Beginning accounts payableEAP = Ending accounts payable​

Calculating the Accounts Payable Turnover Ratio

Calculate the average accounts payable for the period by adding the accounts payable balance at the beginning of the period from the accounts payable balance at the end of the period.

Divide the result by two to arrive at the average accounts payable. Take total supplier purchases for the period and divide it by the average accounts payable for the period.

Decoding Accounts Payable Turnover Ratio

The accounts payable turnover ratio shows investors how many times per period a company pays its accounts payable. In other words, the ratio measures the speed at which a company pays its suppliers. Accounts payable is listed on the balance sheet under current liabilities.  

Investors can use the accounts payable turnover ratio to determine if a company has enough cash or revenue to meet its short-term obligations. Creditors can use the ratio to measure whether to extend a line of credit to the company.

A Decreasing AP Turnover Ratio

A decreasing turnover ratio indicates that a company is taking longer to pay off its suppliers than in previous periods. The rate at which a company pays its debts could provide an indication of the company’s financial condition. A decreasing ratio could signal that a company is in financial distress. Alternatively, a decreasing ratio could also mean the company has negotiated different payment arrangements with its suppliers.

An Increasing Turnover Ratio

When the turnover ratio is increasing, the company is paying off suppliers at a faster rate than in previous periods. An increasing ratio means the company has plenty of cash available to pay off its short-term debt in a timely manner. As a result, an increasing accounts payable turnover ratio could be an indication that the company managing its debts and cash flow effectively.

However, an increasing ratio over a long period could also indicate the company is not reinvesting back into its business, which could result in a lower growth rate and lower earnings for the company in the long term. Ideally, a company wants to generate enough revenue to pay off its accounts payable quickly, but not so quickly the company misses out on opportunities because they could use that money to invest in other endeavors.

AP Turnover vs. AR Turnover Ratios

The accounts receivable turnover ratio is an accounting measure used to quantify a company’s effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid.

The accounts payable turnover ratio is used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover shows how many times a company pays off its accounts payable during a period.

Accounts receivable turnover shows how quickly a company gets paid by its customers while the accounts payable turnover ratio shows how quickly the company pays its suppliers.

Limitations of AP Turnover Ratio

As with all financial ratios, it’s best to compare the ratio for a company with companies in the same industry. Each sector could have a standard turnover ratio that might be unique to that industry.

A limitation of the ratio could be when a company has a high turnover ratio, which would be considered as a positive development by creditors and investors. If the ratio is so much higher than other companies within the same industry, it could indicate that the company is not investing in its future or using its cash properly.

In other words, a high or low ratio shouldn’t be taken on face value, but instead, lead investors to investigate further as to the reason for the high or low ratio.

Example of the Accounts Payable Turnover Ratio

Company A purchases its materials and inventory from one supplier and for the past year had the following results:

• Total supplier purchases were $100 million for the year.
• Accounts payable was $30 million for the start of the year while accounts payable came in at $50 million at the end of the year.
• The average accounts payable for the entire year is calculated as follows:
• ($30 million + $50 million) / 2 or $40 million
• The accounts payable turnover ratio is calculated as follows:
• $100 million / $40 million equals 2.5 for the year
• Company A paid off their accounts payables 2.5 times during the year.

Assume that during the same year, Company B, a competitor of Company A had the following results for the year:

• Total supplier purchases were $110 million for the year.
• Accounts payable of $15 million for the start of the year and by the end of the year had $20 million.
• The average accounts payable is calculated as follows:
• ($15 million + $20 million) / 2 or $17.50 million
• The accounts payable turnover ratio is calculated as follows:
• $110 million / $17.50 million equals 6.29 for the year
• Company B paid off their accounts payables 6.9 times during the year. Therefore, when compared to Company A, Company B is paying off its suppliers at a faster rate.

What Is Average Cost Method?

Average cost method assigns a cost to inventory items based on the total cost of goods purchased or produced in a period divided by the total number of items purchased or produced. Average cost method is also known as weighted-average method.

Understanding the Average Cost Method

Businesses that sell products to customers have to deal with inventory, which is either bought from a separate manufacturer or produced by the company itself. Items previously in inventory that are sold off are recorded on a company’s income statement as cost of goods sold (COGS). COGS is an important figure for businesses, investors, and analysts as it is subtracted from sales revenue to determine gross margin on the income statement. To calculate the total cost of goods sold to consumers during a period, different companies use one of three inventory cost methods:

Average cost method uses a simple average of all similar items in inventory, regardless of purchase date, followed by a count of final inventory items at the end of an accounting period. Multiplying the average cost per item by the final inventory count gives the company a figure for the cost of goods available for sale at that point. The same average cost is also applied to the number of items sold in the previous accounting period to determine the COGS.

Example of Average Cost Method

For example, consider the following inventory ledger for Sam’s Electronics:

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.

Formulas for the Aroon Indicator


$\begin{aligned} \text{Aroon Up}&= \frac{25-\text{Periods Since 25 period High}}{25} \ast100\\ \text{Aroon Down}&=\frac{25-\text{Periods Since 25 period Low}}{25}\ast100 \end{aligned}$Aroon UpAroon Down​=2525−Periods Since 25 period High​∗100=2525−Periods Since 25 period Low​∗100​

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.

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.