Rate Of Change (ROC): Definition and Trading Strategies

At DTTW, our goal is to provide traders from around the world the opportunity to make money trading in the financial market. We believe in equipping new and experienced traders with knowledge and tools to achieve this.

As such, in the past few months, we have been looking at various technical indicators. We have covered indicators like the Relative Strength Index (RSI), Momentum indicator, and the Ichimoku Kinko Hyo.

In this report, we will look at the Rate of Change (RoC) indicator.

Technical Indicators Recap

Before we cover the ROC indicator, let us look briefly at what we have studied so far in this journey.

First, we saw that there were two main types of indicators. Lagging indicators are those indicators that use past data to predict the future. Examples of lagging indicators are moving averages and the Parabolic SAR.

Leading indicators on the other hand use historic data and various assumptions to predict future prices. Oscillators like the RSI and the Relative Vigor Index (RVI) are leading indicators.

Second, we have seen that indicators are calculated using complex mathematics. Still, while you can opt to calculate the indicators, we have seen that it is not necessarily necessary.

Third, we have observed the importance of combining various indicators.

What is the Rate of Change (ROC) Indicator?

The Rate of Change is an indicator that is also known as momentum. We have covered the momentum indicator before.

The indicator is found as a default in most platforms like MetaTrader and TradingView. In these platforms, the indicator is usually grouped in the oscillator category.

As we mentioned before, the ROC is a momentum oscillator that measures the percent change in price from one period to another. It is calculated by comparing change of price with the periods.

When applied on a chart, the indicator has two lines: The first is the centreline, which is usually zero. The second line is the signal line. This is what traders use to interpret the movement.

How to Calculate the indicator

The ROC indicator is calculated using a very simple method.

ROC = ((Close – Close n periods ago) / (Close n periods ago)) X 100

As with all indicators, you don’t need to calculate this indicator. You can just apply it on a chart and interpret it.

How to Use the Rate of Change Indicator

As mentioned above, the ROC or momentum indicator measures the percentage rise or fall of price over a period of time. In other words, it measures the percentage increase or decrease of price over a period of time.

Therefore, when the price of an asset rises, the ROC indicator is usually positive. Similarly, when the price falls, the momentum indicator is usually negative.

Unlike other momentum indicator, there is no ceiling or floor.

Confirm a Trend

Traders use the momentum indicator in various ways. The way we prefer to use it is to confirm an already-established trend. A good example is shown on the chart below.

The blue lines shows how the price drops as the RC indicator drops too. The red lines show how the price rises as the price of the USD/CAD indicator rises as well.

Therefore, you can use the indicator to confirm a trend.

Use of ROC for USD-CAD price

Use of ROC for USD-CAD price

Use it with other indicators

Another way we use the ROC indicator is to confirm what other indicators have shown. Most importantly, we use it to confirm what lagging indicators like moving averages and the Ichimoku Kinko Hyo have shown.

In the example below, we have combined the momentum indicator with the double exponential moving averages.

ROC and DEMA combined

ROC and DEMA combined

Final Thoughts

The Rate of Change (ROC) indicator is an important and common indicator. It is often known as the momentum indicator, and is used mostly to confirm trends. It is ideally used when the market is either trending upwards or downwards. As

a trader, we recommend that you first test the indicator using a demo account before you use it on a live account. This will help you select the best period to use.

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