Price Rate of Change (ROC)

Type

Momentum Indicator closing price relative to previous closing price

How does it work?

The Price Rate-of-Change (ROC) indicator displays the difference between the current price and the price n-time periods ago. The difference can be displayed in either points or as a percentage.

It is well recognized that security prices surge ahead and retract in a cyclical wave-like motion. This cyclical action is the result of the changing expectations as bulls and bears struggle to control prices.

The ROC displays this wave-like motion in an oscillator format by measuring the amount that prices have changed over a given time period. As prices increase, the ROC rises; as prices fall, the ROC falls.

Trading Signals

The higher the ROC, the more overbought the security; the lower the ROC, the more likely a rally. However, as with all overbought/over-sold indicators, it is prudent to wait for the market to begin to correct (i.e., turn up or down) before placing your trade. A market that appears overbought may remain overbought for some time. In fact, extremely overbought/oversold readings usually imply a continuation of the current trend.

Settings

The time period used to calculate the ROC may range from 1-day (which results in a volatile chart showing the daily price change) to 200-days (or longer). The most popular time periods are the 12 and 25-day ROC for short to intermediate-term trading. Sharechart uses the 12-day ROC.

Sharechart Default:  12 period, 12 period

Example

The Price Rate of Change (ROC) indicator is illustrated below the daily share chart of Ion Ltd. Notice that ROC was very high before the share drop.

The setting for the Price Rate of Change (ROC) for the graph above was 25 periods and 25 periods. It can be modified: go to Settings > Indicators > Price Rate of Change (ROC).