Technical traders are well aware of oscillator indicators. Smoothed Rate of Change indicator belongs to the oscillator family. Let’s find out how to use it in forex trading.
What is the Smoothed Rate of Change Indicator?
The ROC (Rate of Change) indicator is a tool that shows in percentage terms the difference between the current price and the price several periods ago. In different types of analysis, it acts as both an oscillator confirming the trend movement and a trend indicator.
The simplest interpretation of its signals. If the indicator curve rises, the asset’s current price moves away from the previous values, buyers are optimistic, and the trend goes up. If the ROC value goes down, sellers lead the market.
Rate of Change has almost no settings. This simplifies the task of optimization for novice traders but, at the same time, sets strict boundaries for its application.
How to trade the Smoothed Rate of Change Indicator?
The ROC technical indicator is convenient for novice traders because it has almost no settings. The main parameter is the period. It means which candle in the account back from the current one is used in the calculation.
An additional parameter is the price type: closing price, opening price, maximum, minimum, or average price. The default period is “9”. This is the optimal parameter for pairs of “majors” on the hourly interval.
With such a period, the Rate of Change gives signals leading by 1-2 candles, which can be effective. For scalping, the period can be reduced. Meanwhile, periods can be increased for day trading.
You may also use the indicator to trade the divergences. However, beginner traders may not find it easier to hunt the divergence. Moreover, divergence could be false during strongly trending markets.
Buy Signal
Let’s take a look at the buy setup of Smoothed ROC indicator:
- You should wait for the ROC indicator to move above the zero line.
- You should wait for the price to form a bullish candle.
- You could place stop-loss around the recent swing low.
- You could place the take profit near the immediate resistance level.
Sell Signal
Let’s take a look at the sell setup of Smoothed ROC indicator:
- You should wait for the ROC indicator to move below the zero line.
- You should wait for the price to form a bearish candle.
- You could place stop-loss around the recent swing high.
- You could place the take profit near the immediate support level.
Conclusion
Like any other technical indicator, Smoothed Rate of Change indicator could be useful in your trading career. However, this is not a holy grail. You should cautiously use the indicator. Always manage your risk prudently. It is not wise to risk too much on any strategy and practice on a forex demo account to begin with.
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