Price Rate Of Change Indicator (ROC)

Rate of Change (ROC) is a momentum-based technical indicator that measures the percentage change in price between the current price and the price of a specified number of periods ago. The ROC indicator is displayed relative to zero, while the indicator moves up to positive territory if price changes are in upward direction, and going to the negative territory if price changes are in downward direction.

The indicator can be used to spot divergences, overbought and oversold conditions, and centerline crossovers. The Rate of Change indicator (ROC), also called simple momentum or movement, is a bend in pure movement. The ROC is calculated by comparing the fair value with the price ‘n’ periods. The chart generates an oscillator that fluctuates up and down from the zero line as the speed or Rate of Change changes from positive to negative. Like other momentum indicators, ROC overbooks or overbought and acceleration or oversold zones can be customized according to market conditions. Remember that a security can be oversold / overbought longer and can be oversold / overbought over a long period.

Zero-line crossovers can be used to signal shift changes. Depending on the ‘n’ value used of these signals may occur at the beginning of the trend change cycle (small ‘n’ value) or late in a trend change cycle (large ‘n’ value). The ROC is prone to beating, especially at the zero line. Therefore, this signal is usually not used for trading, but only to alert traders that a changeover may be initiated.
The ROC is also often used as a divergence indicator to indicate the possibility of upside trend change. It makes a difference when the price of a stock or another asset moves in one direction while its ROC goes in the other direction. For example, if a stock price is rising over a period of time while the ROC is still moving lower, then the ROC is signaling a jump out of the price, which indicates the potential for trend change to the bottom. The same is true if the price has gone down and the ROC has risen higher. This could signal a price increase. Divergence is a poor characteristic of poor quality because variability can last a long time and does not always lead to volatility.
Key Characteristics
  • The rate of exchange (ROC) oscillator is a dynamic and limiting signal strength used in technical analysis against the zero-level midpoint.
  • An increase in the ROC above zero usually indicates a high while a fall in the ROC below zero indicates a decrease in price.
  • When the price consolidates, the ROC will gradually move closer to zero. In this case, it is important that buyers note the total cost of the trend since the ROC will provide little insight unless the merger is confirmed.

How this indicator works 

  • The increase on the Rate-of-Change reflects the rapid price first. Falling in price is a low price.
  • In general, prices increase if the Rate-of-Change remains positive. On the other hand, prices fall if the Rate-of-Change is negative.
  • Expands the ROC into a positive territory as the speed increases. The ROC is moving deeper into negative territory while a decline has accelerated.

Rate of Change (ROC) calculation

ROC is the percentage change between the current price relative to a previous closed price of ‘n’ previous periods.