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Learn Technical Indicator ROC (Rate of Change)

What is ROC (Rate of Change)?
The Price Rate of Change or in short known as ROC is a Technical Indicator which measure the change in price of an underlying asset over a given period of time. The rate of change can be set for any specified time period from day 1 to 200 days, depending on traders choice and the interpretation he wants to do. However the common ones are 10, 12 or 25 days.

The Rate Of Change Indicator is an momentum Oscillator and like other oscillator its measures is based around a 0 (zero) setting. ROC above the zero is considered positive or bullish, while below the zero line is considered negative or bearish.

ROC study is utilized by the traders for interpreting various technical signals such as confirming price movements, determining divergences,to find the levels of overbought and oversold conditions etc.


Formula For Calculating Rate of Change (ROC)

The Price Rate of Change(ROC) can be expressed in either points or percentages.

To Calculate ROC you need,
1)the present or today's closing price of the financial asset represented as Close(i), and
2)the closing price of the financial asset after n number of days represented as Close(n):

Formula for Calculating ROC in points
ROC = (CLOSE (i) - CLOSE(n) / CLOSE (n)

Formula for calculating ROC in percentage
ROC = ((CLOSE (i) - CLOSE (i - n)) / CLOSE (i - n)) X 100
(For the clarity of the chart percentage is calculated.

As mentioned earlier, Using ROC indicator many signals can be derived few are listed below:
1)price moves: Values of ROC indicator are oscillating around zero. When ROC crosses above the zero line buying signal (bulls are taking over bears) is generated. Similarly when ROC goes or crosses below the zero line then selling signal (or bears are taking over the bulls) is generated.
2)detect divergences: Divergence signals indicates that the trend is about to change. Divergence is identified when the price of the financial asset and the indicator is moving in opposite direction.
A positive divergence is identified when the ROC moves up while the price of the financial instrument goes down.
A negative divergence is the opposite of positive divergence here the ROC goes down while the price of the financial instrument goes up as shown in the figure above.
3)overbought and oversold conditions: When the price of the financial assets climbs and reaches higher levels or lower levels it signals oversold or overbought condition as illustrated in above figure.

In an overbought area it is not advisable to buy, instead sell is more advisable. In the same way, in oversold areas it is not a good idea to sell as bulls are trying to take over the bears generating buy signals.

Precaution to be taken while using ROC:
As mentioned a number of times in TopStockResearch tutorials, always incorporate other technical indicators in your study, to minimize any false signal, if any generated. While utilizing ROC study also add other technical tools like Volume etc. to reconfirm what the Rate Of Change indicator is signalling.

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Posted on: 18-Mar-2015
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(All analysis is based on End of Trade day's Value. Expected time of update is between 5 to 5.30 PM exchange time Zone)

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