The Price Rate of Change (ROC) is a powerful momentum-based technical indicator that measures the percentage change in price between the current price and the price from a specified number of periods ago. It is adept at identifying trends, spotting divergences, and discerning overbought and oversold market conditions.
The ROC indicator is designed to plot values around a zero line. If prices rise, the ROC moves into positive territory, and if they fall, it moves into negative territory.
Key Takeaways
- The ROC is an unbounded momentum indicator centered around a zero-line, useful in technical analysis.
- A rising ROC above zero confirms an uptrend, while a falling ROC below zero signals a downtrend.
- During consolidation periods, ROC hovers near zero, indicating little momentum. Traders must watch the overall trend for insights during these times.
Image by Sabrina Jiang
Formula for the Price Rate of Change Indicator
ROC =
rac{(Closing Price_p - Closing Price_{p-n})}{Closing Price_{p-n}} imes 100
- Closing Priceₚ: The closing price of the most recent period.
- Closing Priceₚₙ: The closing price n periods before the most recent period.
Calculating the Price Rate of Change Indicator
Calculating the ROC requires selecting an n value, reflecting the number of periods in the past to compare with the current price. This value varies with the strategy: shorter-term traders might choose a small n value like 9, while long-term investors might use a larger value like 200.
- Select an n value, suitable for your trading strategy (e.g., 12, 25, 200).
- Identify the most recent period’s closing price.
- Find the closing price from n periods ago.
- Insert these prices into the ROC formula.
- Calculate a new ROC value for each new period.
Interpreting the Price Rate of Change Indicator
The ROC functions as a velocity or momentum indicator, evaluating the strength of price movements. For instance, if a stock’s price closes at $10 today and was $7 five trading days ago, the five-day ROC is 42.85, derived from:
((10 - 7) ÷ 7) imes 100 = 42.85
The ROC chart typically appears below the price chart. A zero line on the chart separates positive from negative values, signaling upward or downward momentum accordingly. Surging values illustrate strong momentum, whereas values near zero reflect diminishing moves.
Zero-line crossovers often indicate trend shifts—early warning signals for small n values and later signals for larger ones. Due to potential whipsaws near zero, these signals shouldn’t solely guide trading decisions but highlight possible trend changes.
Overbought and oversold levels fluctuate by asset. Traders pinpoint values that historically result in reversals and anticipate comparable behavior in the future.
Traders can also detect upcoming trend reversals through divergence, where price moves in the opposite way to the ROC. This divergence offers insights, though it’s not always a reliable timing method due to potential prolonged divergence without a resulting price reversal.
Comparing ROC and the Momentum Indicator
Although the ROC and Momentum indicators offer similar insights, differences exist. The ROC focuses on percentage changes by assessing price differences proportional to past prices. Conversely, most Momentum indicators simply multiply by 100 or divide current prices by historical prices, each multiplied by 100, resulting in marginal differences useful depending on traders’ preferences.
ROC Indicator Limitations
The ROC gives equal weight to recent and n-period-ago prices. Many analysts, however, prioritize recent prices for future predictions.
Additionally, the ROC experiences whipsaws near the zero line, reflecting diminished price changes during consolidation. As a result, traders should use the indicator alongside other methods for diversified analysis.
Related Terms: Momentum Indicator, Divergence, Overbought, Oversold, Zero-Line Crossovers, Whipsaws.
