This filter looks at an instrument's Aroon Oscillator value (ARO), and if it's above (or below) the threshold ARO value that you specified, that instrument will be considered as a buy (or sell).
Aroon Oscillator is a derivative and summary of the Aroon Indicators (both Aroon Up and Aroon Down). All three of them make up the Aroon System, developed by Tushar Chande in 1995.
Essentially, the Aroon System tells you of two things:
It does this by gauging how long it takes for a new high (price) to appear from the previous high. Or the reverse: how long it takes for a new low to appear from the previous low. In other words, this Oscillator cares only about the frequency with which the new highs (or lows) are forming, not how big the prices are moving. This is based on the assumption that:
As the name suggests, this filter oscillates between a value of -100 to 100:
1. The first parameter defines the ARO period to find the new high and the new low within that period. For example, we'll go with a value of 25 days here: The filter will look at the highest and lowest prices within that 25-day period.
If the highest price was formed 1 day ago, while the lowest price was 24 days ago, we'll have a very high oscillator reading, nearing 100; and vice versa: if the lowest price was formed more recently than the highest price, we'll have a negative reading.
Throughout time, this value “decays” (approaching 0) until a new record price is found. The filter constantly looks at the new high and the new low throughout this moving window of 25 days.
Adjust this period according to your trading duration, whether you're a short-term or long-term trader. If you set this period too short, you'll get many false signals, as the trend can not be clearly established. If you set this too long, you'll be too late to jump on the trend wagon (the trend may be nearing its end).
Generally, for a short term trader, use a value less than 25 days here. While for a longer term trader, set a period greater than 25 days. If you're in doubt, you can look at the Instrument Tab for the ARO indicator (below the price chart), and see if the ARO line corresponds to the price chart's clear uptrend and downtrend (within your trading duration). If it's not, adjust this period accordingly until you see clear correlation.
2. The second parameter lets you choose whether the instrument's ARO must be “Above” or “Below” the threshold ARO value. Generally, you set this to “Above” for a Buy Filter, and “Below” for a Sell Filter.
3. The third parameter defines the threshold ARO value, as already explained before. For example, you can set a Buy Filter that finds instruments whose ARO is “Above” 50, which is generally an uptrend.
Or the reverse, set a Sell Filter that will exit any positions whose ARO is “Below” -50, which is generally a downtrend.
Once this filter is applied (and the strategy is backtested), you'll see the ARO indicator on the chart below the price chart (Instrument Tab). Make sure you select an instrument first before such indicator may appear.
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