The Simplest Trend Indicator For Investing
In the world of active trading and investing, you will quickly find yourself berated with articles, advertisements, promises, and complications of what trading indicators to use that have the best results. What most of these will not tell you is that it’s in the user of the indicator to make his or her determination as to how effective that particular method is. The reason for this is simple: indicators are nothing more than mathematical derivatives of the price in front of your face.
But there’s one indicator that never gets much spotlight, at least with its brother and sister MACD and the Exponential Moving Average. We don’t even mention it in our book “Befriending The Trend” due to not suiting our particular methods of measuring risk. But if you’re a person who isn’t a chart-reader, and prefer things such as long-term value investing, then you still are going to want to know when the proper time to buy and sell might be.
Enter the Aroon Indicator. It’s been around since 1995, but you’ve probably never heard of it. The Aroon Indicator is designed to spot a new up or down trend in the most simplistic way, by making time relative to price vs the opposite. In a nutshell, it measures the X amount of periods since a high/low with the Aroon Up and Aroon Down Lines.
In the example above, the Aroon is set to a 50 period setting, on the daily chart for Nvidia (NVDA). The green line is the 50 period Aroon Up, and the red line is the 50 period Aroon Down. Without discussion of stop-loss or risk, the indicator provides the simple answer to the question “When do I buy/sell?”.
When the green line is ascending and crosses the red line, that’s a buy. When the red line is ascending and crosses the green line, it’s a sell. By doing a 50 period on the daily, it allows the indicator to filter out noise price-action. As you can see above, the last buy signal was March 15, 2016. Since then the price accumulated 320% return until the Aroon lines crossed again. Now, NVDA stands at >$135/share.
So, if you focus on fundamentals, but want to ensure you aren’t “catching the falling knife” of a downtrend, then the Aroon Indicator might be just what you’re looking for. This is also a great tool for beginner traders and investors, because it’s simple and leaves no room for interpretation. However, unless if you plan on holding even if the trend turns against you, you better have an exit plan. Otherwise, the red line crossing could definitely put you in the red.