What Is The Rate of Change Indicator & How To Trade With It

Rate of Change Indicator

The Rate of Change Indicator is a momentum indicator that describes the percentage price change between the current price and the previous price. The ROC is also known as the PROC (price rate of change indicator).

What is the Rate of Change indicator?

Just like other momentum indicators; the ROC forecasts change in price based on calculations. The percentage is obtained by plotting the ROC against zero. When the price moves above zero, the ROC indicates an uptrend, while it signifies a downtrend when the price moves into negative territory.

The formula for calculating the ROC is:

ROC = closing price p – closing price p-n / closing price p-n * 100

Where;

Closing price p = closing price of a recent period

Closing price p – n = closing price of n periods before the recent one.

A keynote to add is the value differs with the timeframe. For example, short-term traders may use 9 as the value of n, and long-term traders may apply n = 200.

Assume that the current value of EUR/USD is 1.1840. It was at 1.1810 the previous day, so ROC value will be; (1.1840 – 1.1810) / 1.1810 * 100 = 0.2540.

This is what the Rate of Change indicator looks like:

ROC indicator on the chart
ROC indicator on the chart

There is an interesting similarity between the Momentum indicator and the ROC. Some traders may see both as identical. However, there is a difference between their values. The ROC computes values as a percentage, while the Momentum indicator doesn’t give a percentage.

How to use the Rate of Change indicator?

Many momentum oscillators produce bullish and bearish patterns at a certain level. The bullish patterns emerge when the ROC’s value rises above the zero-line. On the other hand, the bearish pattern surfaces when the ROC’s value drops below the zero-line.

The zero-line crossovers can be seen as a trend detector depending on the value of n. If the value is smaller, it can detect the trend earlier. However, the smaller the value of n, the more its chances of producing false signals. Also, when the ROC is near the zero-line, it can give whipsaws. So, to avoid this, traders need to utilize the ROC as a signal detector and not an entry point.

Divergences are part of momentum oscillators, and the ROC is no different. Divergences are seen as a potential reversal. The ROC shows positive divergences (bullish) when the price moves down, and the ROC is going up. Contrarily, the ROC presents negative divergences (bearish) when the price is jumping high, and the ROC is declining.

Rate of Change indicator trading strategy

As mentioned earlier, the ROC can be used for short-term and long-term traders, depending on their choice of n’s value. But short-term traders should be careful when selecting smaller n value, as it’s prone to give false signals.

Rate of Change indicator buy strategy

  • Apply the indicator on the chart.
  • The ROC should be above the zero-line.
  • Wait for the price bar to go bullish before entering.
  • Enter the trade when the ROC is in a positive zone.
  • Place a stop-loss near the recent low.
  • Exit the trade before the ROC drops below the zero-line.

Rate of Change indicator sell strategy

  • Apply the indicator on the chart.
  • The ROC should be below the zero-line.
  • Wait for the price bar too go bearish before entering.
  • Enter the trade when the ROC is in a negative zone.
  • Set a stop-loss near the recent high.
  • Exit the trade before the price rises above the zero-line.

Rate of Change indicator conclusion

The Rate of Change indicator is an identifier of a price change that can be used on your forex trading platform charts to help filter potential trading signals as part of an overall trading strategy.