What is the Rate of Change Indicator ROC?

Technically, positive ROC values or high momentum levels indicate that a security is likely to outperform the broader market in the short term, usually spanning 1-6 months. On the contrary, lower momentum signals a more bearish performance, guiding traders to be cautious in their strategies. It is calculated by comparing the current closing price with the closing price N periods ago. And so, it measures the Rate of Change in price for a specified look back period. Although simple in its construction, the ROC indicator can be quite powerful in gauging the underlying price action on the chart.

How can ROC help identify potential trend reversals?

Overall, the rate of change indicator was a good performer, outperforming 60% of the Dow Jones 30 Index by significant margins over the last 12 years. Over a 20-year backtest, ROC beat buy and hold on 66% of the stocks. Here, you can see the entire performance results for Apple Inc., the best-performing stock in the Dow Jones Industrial Average index.

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Traders also can pay close attention to the speed at which one price changes relative to another. Most technical analysts consider centerline crossovers as an indication of a trend change. However, the centerline crossovers are prone to whipsaw, especially short-term. The “n” value has a great impact on how often the indicator crosses the centerline. Smaller values often result in more frequent crossovers or signal an early trend change.

• The method of analysis with the price rate of change indicator is nearly the same as with most other commonly used oscillators such as the MACD for example.
• A positive ROC indicates an uptrend, while a negative ROC signals a downtrend.
• As its name implies, it measures the rate at which the security’s price changes over time.
• When the Rate of Change is above zero line but falling, it shows that the speed of the uptrend is slowing down.

How can you use the rate of change oscillator in technical analysis?

Like most momentum oscillators, the ROC appears on a chart in a separate window below the price chart. The ROC is plotted against a zero line that differentiates positive and negative values. Positive values indicate upward buying pressure or momentum, while negative values below zero indicate selling pressure or downward momentum. Increasing values in either direction, positive or negative, indicate increasing momentum, and moving back toward zero indicates waning momentum. Nonetheless, it’s essential to acknowledge that, like any indicator, MACD may sometimes generate false signals.

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Conversely, hidden bullish divergence arises when the ROC makes a new higher high, while the rising price fails to make a new higher high, suggesting a continuation of the bullish trend. The stop loss should be placed above the swing high preceding this sell signal as can be seen by the black dashed line above it. The target level for exiting the trade would be measured using the https://forexarena.net/ Fibonacci retracement tool. More specifically, we would measure from the swing low to the swing high of the prior uptrend, and use the 50% fib retracement level as the exit point. The green horizontal line plotted on the price chart represents this 50% Fibonacci retracement level. There are several ways that traders can incorporate the ROC indicator into their trading strategy.

ROC Performance Results Chart

The Rate of Change (ROC) indicator is a potent technical analysis tool used to analyze the momentum of price movements. Developed by Fred G. Schutzman, ROC provides valuable insights into the speed and direction of price changes, making it a crucial element for traders seeking to stay ahead in the market. The middle line represents the simple moving average (SMA) — an asset’s average price over a defined period — and two outer bands that show the standard deviation of the price. The bands widen during high volatility and contract during periods of low volatility.

If you refer to the above chart again, you will notice the large down gap that was formed in price. It tracks if the speed of a trend is accelerating, slowing down or maintaining the same speed. ROC is a refinement of Momentum – readings fluctuate as percentages around the zero line. 2009 is committed to honest, unbiased investing education to help you become an independent investor. We develop high-quality free & premium stock market training courses & have published multiple books. We also thoroughly test and recommend the best investment research software.

Thus, traders will be able to access it within their platform’s library of technical indicators. We will outline some of the most important characteristics of the ROC indicator, and provide insights into applying it in the correct manner. The rate of change is an important financial concept because it allows investors rate of change indicator to spot security momentum and other trends. For example, a security with high momentum, or one that has a positive ROC, normally outperforms the market in the short term. Conversely, a security is more likely to decline if it has a ROC that falls below its moving average or one that has a low or negative ROC.

It offers several advantages, including easy accessibility to information and guidance on its practical use. Moreover, RSI provides traders with clear signals of overbought or oversold conditions, aiding in making informed trading decisions. We mentioned that the ROC indicator can highlight divergences and possible trend changes. This is an example of the ROC indicator giving false signals for a very long time period. There are at least 3 peaks for the ROC reading, and all of them would have given wrong trading signals to investors. The ROC indicator is a leading indicator, meaning it can provide early signals of potential trend reversals and changes in market momentum.

While it might look easy in hindsight, it is important to note that the ROC oscillator will be difficult to pick up the tops and bottoms or in other words, rising and falling momentum in price. With some smoothing, the ROC oscillator moves around the 0-line from positive to negative. When momentum increases, the ROC oscillator moves from negative to above the 0-line and when momentum decreases, the ROC oscillator moves from positive and above the 0-line to negative. The rate of change is most often used to measure the change in a security’s price over time. This is also known as the price rate of change (also abbreviated ROC).

Traders can also observe how the price hits other key levels, such as 0.618 and 0.786, and may build a channel between these levels. This channel may sometimes last for a few days before breaking further down. Therefore, traders should complement its use with other indicators to validate their analysis.

The ROC indicator measures the percentage change in price over a specific period, comparing the current price to the price “n” periods ago. Likewise, a sharp decline below the zero line indicates a potential continuation of a downward trend. However, to further validate the breakout signal, traders often employ another indicator, such as a moving average or Bollinger Bands. The ROC indicator is useful for identifying potential trend reversals. However, the indicator is also extremely effective in identifying areas where the market breaks above or below a certain support or resistance. The zero line on the ROC indicator plays a pivotal role in detecting new trends.

If you observe ROC hovering around zero, you can hold off trading other indicator signals because they are likely false. The Rate of Change (ROC) is a momentum indicator that measures the speed and direction of asset price movements. It helps traders determine whether a security is trending and how quickly its price changes. The slope of the ROC readings and its actual readings can confirm the recent trend and its strength. An extreme slope of the ROC shows excessive buying or selling pressure and may not be sustainable over time.

In this case, the rate of change could be seen as a sell signal to investors. Furthermore, the rate of change can show divergence from the price action, which could signal a potential trend change. Divergence occurs when the price is moving in one direction while the indicator is moving opposite. A bearish divergence is when the price of a security is increasing while the rate of change is decelerating, which could indicate a trend reversal. ROC is also commonly used as a divergence indicator that signals a possible upcoming trend change. Divergence occurs when the price of a stock or another asset moves in one direction while its ROC moves in the opposite direction.

Once ROC is above the zero line and keeps on rising, it shows that the trend is not only up but the speed of the uptrend is accelerating. Our 20 years of testing shows it performs really well, with a 66% chance of outperforming a buy-and-hold strategy. The table below shows the best and worst-performing stocks in terms of the risk-reward ratio.