Many traders use ROC in their trading strategies. They also used as a divergence indicator that signals a possible upcoming trend change. ROC is a momentum oscillator, which measures the percentage change between the current price and the n period past price. This technical indicator is used to identify a general trend, oversold, overbought conditions as well as divergences. A rising ROC typically confirms an uptrend. But this can be misleading, as the indicator is only comparing the current price to the price N days ago. A falling ROC indicates the current price is below the price N days ago. This usually helps confirm a downtrend but isn’t always accurate.
The construction algorithm and method of its application are so simple and understandable that even beginners will be able to make a profit using ROC. The oscillator generates signals to open and close transactions. Like most 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. The Olymp Trade trading platform includes ROC in the standard list of indicators.
How to calculate the Rate of Change (ROC)?
ROC is a popular financial oscillator. The indicator consists of a scale with levels and changes their direction depending on changes in prices. You can find it in a separate window under the chart.
The main step in calculating the ROC is to pick the “n” value. The value of n can be anything. Short-term trader traders typically use a smaller number while longer-term investors use a larger number.
Then, the Rate of Change is calculated using the following formula:
RoC = (C / Cn) * 100.
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 moves back toward zero indicate waning momentum.
The recommended steps are as following:
- ROC crossovers can be used to signal trend changes.
- ROC can be used as a divergence indicator that signals a possible upcoming trend change.
Experts also recommend watching ROC for the following signals:
- Watch for when the line crosses the zero level is necessary in the direction of the trend. The uptrend is when the line crosses zero from top to bottom. The downtrend is when the line crosses zero from bottom to top.
- The recommended parameters are 9 to 13.
- The recommended timeframes are from 15 minutes to 4 hours.
How to trade with ROC?
Let’s discuss the methods of how successfully to trade with ROC. If you watch for crossovers, here are the recommended steps:
- CALL when a signal line crosses the key level moving up.
- PUT when a signal line crosses the zero level moving down.
Divergence is when the price of an asset is moving in the opposite direction of a technical indicator or is moving contrary to other data. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction.
There is a positive and negative divergence. Positive divergence signals price could start moving higher soon. It occurs when the price is moving lower but a technical indicator is moving higher or showing bullish signals. Negative divergence points to lower prices in the future. It occurs when the price is moving higher but a technical indicator is moving lower or showing bearish signals.
The recommended expiration period should not be lower than the time of formation of 3 candles.
While the indicator can be used for divergence signals, the signals often occur far too early. When the ROC starts to diverge, the price can still run in the trending direction for some time. Therefore, divergence should not be acted on as a trade signal but could be used to help confirm a trade if other reversal signals are present from other indicators and analysis methods.