RATE OF CHANGE (ROC)

This is a very popular and useful indicator used by technical analysts which changes direction before the underlying price of the security. It is basically a momentum or velocity indicator and it’s movement oscillates around the zero point centerline.

The calculation of ROC is very simple. The formula is as follows :

ROC = ((Today’s close – Close n periods ago) / (Close n periods ago)) * 100

The period can be chosen by the technical analyst but preferally the popular periods used are 7, 14 and 21 days.

A rising ROC indicates a bullish increasing momentum.

A falling ROC indicates a bearish decreasing momentum.

ROC is normally used in conjunction with other technical indicators for signs of reversal of prices.

Interpretation and use of ROC

Rate of Change indicator gives a good insight into the price movements of the stock and the momentum associated with it. It helps to take buy or sell decision of a stock. Some analysts consider that a ROC indicator which is at a high and has begun to move downwards indicates an overbought position and hence is a sell signal. Conversely, ROC indicator which is at a low level and starts moving upwards means a oversold position and hence is a buy signal. Movement towards the zero line indicates that the existing trend is losing it’s momentum and a price reversal is on the cards.

Some analysts use the crossover of ROC above the zero line as buy signal and breach below the zero line as a sell signal.

Divergences between the ROC trend and the price of the security is sometimes interpreted as reversal signs in the trend of the price of the security. It is just an indication or alertness of reversal of trend but not actually a buy or sell signal. As such it should be used in conjunction with other technical indicators.