Rate of Change (ROC)

Overview - Rate of Change

The rate of change compares a securities current closing price against the average closing period for "x" period of time.  The formula for the rate of change is as follows:

So, as you can see the rate of change is simply computed by seeing how well a security is performing relative to itself.  If the security's closing price is below the average for "x" periods, then it will have a negative rate of change value.  The end result of the rate of change plot is an oscillator that fluctuates above and below the zero line.  This provides a quick visual on whether a security is trending positively or negatively.  While the ROC will oscillate above and below the zero line, it is more of a momentum indicator, because there is no upward or downward limit on its value.  So, there is no true universal "oversold" or "overbought" reading like many other oscillators.  The default rate set value for the ROC indicator is 14 periods, just as the slow stochastics and RSI.  Remember, if you choose to use a shorter setting, the number of signals and sensitivity of the indicator will increase.

How to trade using Rate of Change

Traders like to see the rate of change confirm the price action prior to initiating a trade. The rate of change like many other indicators can develop its own set of patterns and trends. Don't make too much of these formations as they are simply a byproduct of the price movement. The key thing you want to look for is if there is any divergence in the ROC indicator and the price formation.  So, if a stock is rallying, you will also want to see the ROC increasing at a steady rate as well.  Any divergence can be used as a "warning" sign that the primary trend is at risk.

Rate of Change Chart Example

Notice how the rate of change and price divergence leads to higher prices.  Remember, the divergence is a "warning" or clue that a change is imminent, but it is no guarantee.  

Rate of Change Chart ExampleRate of Change Chart Example

Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

Tradingsim.com
Day Trading Simulator

Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...

Send this article to a friend.

Enter multiple addresses on separate lines or separate them with commas.