What is Rate of Change (ROC) and How To Compute It?
Rate of Change or ROC is a technical indicator that measures the changes between the percentage compared to the most recent price and the price "n" periods in the past. It is also said that it monitors the momentum of the market. It estimates the market’s rate of change comparative to the previous trading intervals. In the highest level, the indicator might say a market is quite overbought. Valleys or troughs also points out an oversold market situation.
It can also stand alone as an essential indicator used by many technicians interested in market momentum. It has a horizontal median called equilibrium. It is this median that tells us everything we need to know about this type of rate. A few technicians in the market often use a very simple approach for the Rate of Change learning. It is concern with buy and sells signals based upon the zero line or the midpoint. This presumes oversold or overbought market conditions which pave the way of crossover. You may sell when the rate of change line go across from above to below on the other hand you may buy when the indicator intersect from below to above.
It trades with price changing amount during the exact time and match to it as an oscillator that shows the cyclical movement. It goes up along with the prices up-trending and it decreases when the prices go down. If prices go high, changes gives the according significant rate changing.
Mostly, it is best to use this indicator as an antecedent to change in market direction. One good thing to do is to establish extreme zones for the study, much like the Relative Strength Index or Stochastic. However, a good technical analyst must know how to tolerate the study in extreme bull and bear markets. It can generate many sham signals under those market conditions. In addition, the indicator is parallel to an oscillator when it comes to the market accelerating or decelerating.
To compute it, here’s a good example:
Period (10) - the number of bars, or interval, used to calculate the study using the value you specify, it may be computed as the change from the current price relative to the price from the number of specified intervals prior to the current price.
The general formula is as follows:
ROCt = (Pricet / Pricen) * 10000
ROCt is the rate value for the current period. Pricet is the current price. Pricen is the price you specify for the nth interval (open, high, low, close, midpoint or average).
Take the example below which use current price of 7485 and a 7440 price n intervals ago:
ROC = (7485 / 7440) * 10000 = 1.006 * 10000 = 10006
There is a tendency to loss in futures trading. Past results on the other hand are not analytical of future results.
It may also be calculated by using the following formula:
(Closing Price Today - Closing Price "n" Periods Ago) / Closing Price "n" Periods Ago