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). The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a pure momentum oscillator. The ROC calculation compares the current price with the price “n” periods ago.
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:
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.
- An upward surge in the Rate-of-Change reflects a sharp price advance. A downward plunge indicates a steep price decline.
- In general, prices are rising as long as the Rate-of-Change remains positive. Conversely, prices are falling when the Rate-of-Change is negative.
- ROC expands into positive territory as an advance accelerates. ROC moves deeper into negative territory as a decline accelerates.
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. When applied on a chart, the indicator has two lines: The first is the centreline, which is usually zero. The second line is the signal line. This is what traders use to interpret the movement. The signal line is made up of two colors, which are known as Color Up and Color Down.
As mentioned above, the ROC or momentum indicator measures the percentage rise or fall of price over a period of time. In other words, it measures the percentage increase or decrease of price over a period of time. Therefore, when the price of an asset rises, the ROC indicator is usually positive. Similarly, when the price falls, the momentum indicator is usually negative. Unlike other momentum indicator, there is no ceiling or floor.
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. Often referred to as the momentum indicator, the rate of change (ROC) is a momentum-based technical indicator that compares the current price of a security to the price “n” period ago. It is plotted as an oscillator that moves above or below a zero-line as the momentum changes from positive to negative. Like other oscillators, the Rate of Change also has oversold/overbought levels that are adjusted according to the current market situation. At the end of the article we look at several ROC trading strategies.
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