The Rate of Change indicator (ROC) is a momentum oscillator. It calculates the percent change in price between periods. The ROC indicator might be used to confirm price moves or detect divergences. It might also be used as a guide for determining overbought and oversold conditions.
Contents:
- What is ROC and How Do We Chart It?
- How Do We Understand ROC?
- You Can Use It Both as an Oscillator and Trend Indicator
- Combine It with Other Trading Strategies
- The Olymp Trade Blog Provides You with Knowledge
Interact with the underlined words and green dots to get additional details and explanations.
What is ROC and How Do We Chart It?
Rate of Change, or ROC, is an oscillator type of indicator.
Internal calculation of the roc indicator settings follows the following formula:
ROC=(Current Price/Price of n bars ago)-1.0)×100
ROC may also be presented as the percentage change between the current closing price P0 and the earlier closing price P-n which was n periods ago.
ROC=100×(P0 / P-n)
To access the ROC indicator, press on the compass sign at the bottom left and find it among the oscillators in the Indicators sidebar.
How Do We Understand ROC?
The ROC indicator essentially compares the current price with the previous one a selected number of periods ago. The value of ROC is the percentage value obtained as a result of dividing the current price by the previous price.
On its chart, the ROC is measured against the zero line.
As long as the price rises, ROC will stay positive.
When the price falls, ROC will be negative.
The Rate of Change indicator is sensitive to the intensity of the price moves.
A sharp price upswing will usually lead to a strong upwards move of the ROC.
A steep downward price move will usually lead to a plunge of the ROC.
Most often, ROC is set from 12 to 15 periods, which is best for intraday trading. You can set it by pressing on the pencil icon at the upper right corner of the oscillator chart and entering the number you require.
You Can Use It Both as an Oscillator and Trend Indicator
The ROC indicator can be used for both oscillator and trend indicator functions.
Observed against 5 to 15 price candlesticks, ROC will be an oscillator.
Observed against more than 20 price candlesticks, ROC will function as a trend indicator.
Combine It with Other Trading Strategies
To develop an effective roc indicator strategy, you can use it either with other indicators available on the Olymp Trade platform, or simply combine it with trend analysis. Let’s check how the latter works.
Trend-following Strategy
In a trend-following trading strategy, when the ROC indicator crosses the zero-level, it’s a signal to open a trade in the trend direction.
ROC crossing the zero level upwards is an Up trade signal.
ROC crossing the zero level downwards is a Down trade signal.
As any other indicator, ROC is prone to produce false signals sometimes. To reduce this risk, it is recommended to check if the ROC zero-level crossing coincides with the resistance or support line crossing by the price such as in the image below.
If the ROC crosses the zero line upwards, and the price crosses the resistance level upwards, it’s a signal for an Up trade.
If the ROC crosses the zero line downwards, and the price crosses the support level downwards, it’s a signal for a Down trade.
Here is the process of using the ROC together with the price movement in the above scenario:
- Wait for the price to break the local high.
- Wait for the ROC to cross the zero level upwards.
- Open an Up trade at the moment when the ROC crosses the zero line upwards.
The same works for a Down trade in the downward direction.
Resistance and Support Level Breakout Strategy
A more sophisticated approach of using the ROC suggests watching for the moment when the indicator breaks its own trend and opening a trade in that direction.
In the above image, you can see that after a downtrend on the indicator chart, the ROC line breaks the resistance upwards. Soon after, the price does the same.
Here is the process of opening a trade for such a scenario:
- Wait for the ROC to break its resistance.
- Wait for the price to do the same on its own chart.
- Open an Up trade when the price breaks resistance upwards.
The process is applied in a downtrend using the support breakouts to open a Down trade.
The Olymp Trade Blog Provides You with Knowledge
This is just one of the articles dedicated to technical analysis tools. You will find many of them on the Olymp Trade blog. There are many more that are not limited to what’s available on the platform to expand your knowledge about Forex and other trading modes and approaches. Go check them all out and use your knowledge to trade!
Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
