What Is the Price Rate of Change Indicator?  

Cheat Code Staff
rate of change indicator
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The Price Rate of Change (ROC) is a technical metric. 

It assesses the percentage change between the current and previous years’ price levels. 

Initially plotted at zero, the indicator shifts upwards into a positive range once the price rises. 

When the price falls, the indicator moves into the negative range.

Once the price approaches consolidation, the ROC shifts to near zero. 

That’s when you should observe the overall price pattern as a trader.

You can use this indicator to:

Identify divergences

Spot oversold and overbought conditions

Determine centerline crossovers.

Below is a detailed review of the Price Rate of the Change Indicator

How Do You Calculate the Price Rate of the Change Indicator?

The first step involves selecting an “n” value. 

This value compares the current price with the number of trading periods. 

Short-term investors prefer a smaller value like 9, while long-term investors choose values like 200.

Smaller values result in a fast ROC reaction to price changes, while a big ROC implies a slow response.

The main steps in calculating the ROC indicator include:

  • Select an “n” value
  • Identify the most current closing price
  • Derive the period’s closing price from “n” periods ago
  • Attach the prices from steps two and three into the ROC formula
  • Formulate the ROC value for each period that ends

Security with ROC falling below the average is likely to decrease in value. 

It signals investors on the move to make, as the rate of change indicates the market bubbles.

What Does the Price Rate of Change Indicator Imply?

The ROC evaluates the strength of the price momentum using the rate of change. 

It appears as a separate window below the price graph to differentiate the negative and positive values. 

The negative values below zero imply downward selling pressure, while positive values imply upward buying pressure.

The zero-line crossovers imply trend variations. 

The values can appear very late in a particular trend due to a more significant “n” value or early due to a smalln” value. 

When the ROC is around the zero line, it is not applicable for investment purposes. 

This level alerts traders of a specific pattern change that is underway.

ROC is suitable as a divergence indicator to signal potential upcoming trend variation. 

Divergence occurs once a stock’s price moves in one direction and the ROC shifts in the opposite direction. 

If a stock rises over a certain period when ROC moves slowly, the ROC indicates a bearish price divergence

It signifies potential downward change.

Divergence applies when the price moves down and ROC moves upward. 

It signifies an upward price movement. 

Divergence is an inappropriate timing signal as it can last for long without resulting in a price reversal.

Trading Rules and Interpretations

Are you looking forward to learning the rules of ROC trading

Find out below.

◾ A ROC that surpasses the zero line and still rises implies an accelerating speed.

◾ Once the ROC surpasses the zero line but falls, it signifies a decelerating uptrend.

◾ If the ROC is above zero but starts rising and surpasses the previous top, the uptrend is at top speed.

◾ Once the ROC falls below the zero line but keeps falling, it implies an increasing downward trend.

◾ When the ROC falls below zero but begins rising, it means a decreasing speed of the downtrend.

◾ If the ROC is below zero and begins falling, it signifies an accelerating downward trend.

Applying ROC in Trading

rate of change illustration image
Image Credit: comodity.com

Below is how to trade the signals portrayed by the ROC indicator:

Oversold and overbought conditions: 

If a trend loses momentum, it is time to identify trading opportunities in the opposite direction. 

ROC provides a clear image of when to expect these turnarounds per the previous indicator levels.

Breakouts: 

They accompany strong momentum

Momentum implies a continuous trend in a ranging market

ROC prints flat values when the prices are ranging or consolidating. 

A sharp fall or rise ascertains a sustainable breakout.

Zero-line crosses: 

Indicates the formation of a new trend. 

A zero-line cross from below implies that the bull trend is in place. 

A cross from above shows a downward trend is in place.

Divergences: 

A bullish divergence occurs following a low-price formation. 

It signifies the downward trend lacks momentum.

What Are the Limitations of ROC?

➽ The potential problem is that ROC generates equal weight to the current price and the price from n previous periods. 

That’s despite the ROC prioritizing the determination of subsequent price movement.

➽ ROC is susceptible to whipsaws mainly around the zero lines. 

Whipsaws describes a security’s movement when the price moves in one direction and then shifts to the opposite. 

This signal is not suitable for trading.

➽ ROC divergences may give wrong signals

As a trader, you must verify a particular trade and whether other reversal signals emerge from different indicators.

Was This Information Helpful?

It is essential to know how the ROC indicator operates as a trader. 

Understanding the ROC is suitable for identifying extremes and speculating appropriate turning points.

ROC measures the percentage price change between now and some time back, allowing you to make investment decisions. 

You can use the indicator to identify the centerline crossovers and oversold and overbought conditions.

Cheap Code offers a vast array of investment insights to enable you to navigate the stock market. 

Visit our webpage today and get everything you need about everyday stock trading.

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