Rate Of Change (ROC)
Rate of Change (ROC): In finance, this refers to the speed at which an asset’s price changed over a set period, either in percentage or in absolute terms.
Rate Of Change ROC Explained
If the price is above the price x days ago, it is positive and negative if the price has fallen over that time.
So the ROC (also known as Momentum) is the price today minus the price a set number of days ago.
As the indicator rises, it suggests that price momentum is rising (and vice versa for falling ROC).
How To Use RoC Trading
Traders can use this in a variety of ways, as a trend indicator (i.e. buy when it is rising and sell out when the ROC falls below zero).
Or it can be used to spot divergences – when an asset price makes a new high in an uptrend, but the ROC fails to make a new high of its own, it signals a weakening of the uptrend and traders should be on the lookout for a downside reversal.
It can also be used as an overbought/oversold indicator, but as with many momentum indicators, this can generate “false” signals (as high momentum takes prices still higher despite supposed overbought readings).
Studies have confirmed that high ROC/Momentum assets tend to continue to outperform, and thus bullish and bearish divergences are a better method for determining those assets that are vulnerable to a price reversal.
As long as the time horizon is correctly chosen, this is a simple yet powerful tool for spotting both trends and possible reversals.
As with all indicators, however, it is not infallible and should be used in conjunction with other tools (preferably those that help with trend intensity identification (e.g. Bollinger Bands or MACD) to maximise the efficiency of trading signals.