The Strategic Trader
Detailed Strategy Evaluation

Aroon Oscillator

Simple Profitable Strategy: Part 1 (Design)

In this article series we are going to take what we have learned from RSI, MACD, Bollinger Bands, and Aroon Oscillator to build a simple yet profitable strategy. For validation, the strategy testing period will exclude 1/1/2000-6/1/2001 and 1/1/2011 – present. This will allow us to perform sanity checks in later phases to avoid curve fitting.

The goal is to build a strategy that is still profitable after taking out both slippage and commissions. Since most of our articles to date have dealt with the 5 minute time frame on ES, we will continue using those parameters.

The Setup:

In order to build a strategy, we have to have a place to start. For this strategy, we will start by combining the best aspects of each of the trading methods we have tested thus far. Starting with the most recent Aroon Oscillator method.  We identified AroonOscillator(8) crossing below -80 as possessing a slight edge, so we will put a stick in the ground here.

Initial Results (Pre commission/Slippage):

Profit: +$54,987
PF: 1.20
Max DD: -$4,662
Sharp: .58
Trades: 6925
Win %: 58.51%
Average Trade: +$7.94


This is a good start, but far from profitable once commissions and slippage are applied.

Before we move on to filtering out trades or tweaking the exits we need to add more potential “entry conditions”. In this step we go back through all the indicators that showed a slight edge and see if an optimized parameter combination for it improves overall performance.

The main purpose of this phase is to get as many entries as possible while still remaining over our “statically significant” thresholds. Each individual entry criteria does not need to remain above the threshold, but as a whole when used in an if/or combination the strategy needs to at least exceed on percent profitable or pure profit.

  1. Additional Aroon Oscillator Parameter Combinations
    • No additional combinations improved results significantly. AroonOscillator(27) <-99 helped, but not enough to justify inclusion
  2. Cross below Bollinger Lower Band
    • Bollinger(2.5,7) was added to the strategy
  3. MACD cross below signal line
    • MACD(2,12,4) was added to the strategy
  4. RSI Hidden Divergence
    • RSI Hidden Divergence 29,10,4 was added to the strategy
  5. RSI Hidden Divergence
    • RSI Hidden Divergence 14,22,6 was added to the strategy
  6. RSI Hidden Divergence
    • RSI Hidden Divergence 18,6,2 was added to the strategy
  7. Aroon Hidden Divergence
    • Aroon Hidden Divergence 12,17,4 was added to the strategy


Profit: +$81,925
PF: 1.15
Max DD: -$4,700
Sharp: .59
Trades: 13600
Win %: 57.32%
Average Trade: +$6.02

trading strategy development


Several key metrics decreased from the initial entry condition, but this is to be expected. Now we have a basic set of entry conditions providing over 13,000 trades. In the next several articles we will look at different ways of filtering out the non-performing trades, and implement an exit that makes more sense than a static 5 bar exit.

Eventually we will incorporate advanced concepts such as data mining and neural networks to improve the final product.



Trading Methods Using Aroon Oscillator

The Aroon Oscillator is commonly used as a trend following indicator. Meaning buy when trending up, sale when trending down. In this article we will look at the following strategies for trading the Aroon Oscillator:

  1. Buy when aroon oscillator crosses above 0
  2. Buy when aroon oscillator crosses above some value x
  3. Buy when aroon oscillator crosses below 0
  4. Buy when aroon oscillator crosses below some value x

Strategy #1: Buy when aroon oscillator crosses above 0

Almost all parameters result in negative expectancy

Strategy #2: Buy when aroon crosses above some value x

This strategy performs fairly well, as long as x is < 0.  No parameter combination was able to exceed our target thresholds. However, a few came pretty close. The closest one would be AroonOscillator(40) crosses above -99

aroon oscillator strategy 1


Strategy #3: Buy when aroon oscillator crosses below 0

Performs better than when crossing above 0, but is not enough of an edge to use in a strategy.

Strategy #4: Buy when aroon oscillator crosses below x

There were several parameter combinations that exceeded both profit and winning % after 5 bars. The best combination was when aroonoscillator(8) crossed below -80

aroon oscillator strategy 2



Using the aroon oscillator to trade “with the trend”, does not look like a viable strategy. However, buying when aroon oscillator crosses below certain values can yield a small edge. May be useful in filtering out bad trades as we start to build out a strategy.

Source Code:

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