Rate of Change Forex Technical Analysis and Rate of Change Forex Trading Signals
Rate of Change, ROC indicator is used to calculate how much price has changed within a specified number of price periods. It calculates the difference between the current candlestick and the price of a selected number of previous candlesticks.
The difference can be calculated using Points or Percentages. Rate of Change moves in an oscillation manner, where it oscillates above and below a zero center-line level. Levels above zero are bullish while those below zero center-line level are bearish.
The greater the changes are in the prices the greater the changes in the ROC.
Forex Technical Analysis and Generating Forex Trading Signals
Rate of Change indicator can be used to generate Forex trading signals using a number of methods, the most common ones are:
Bullish Signal- buy signal is generated when the ROC crosses above the zero center line
Bearish Signal- sell signal is generated when the Rate of Change crosses below the zero center line.
Overbought - The higher the reading the more overbought a currency pair is. Values that are above the overbought level imply that a currency is overbought and there is a pending price correction
Oversold - The lower the reading the more oversold a currency pair is. Values below the oversold level imply that a currency is overbought and there is a pending price rally.
However, during strong trending markets the price will remain in the Overbought/Oversold Levels for a long time, and rather than the price reversing the price trend will continue for quite some time. It is therefore best to use the crossover signals as the official buy and sell signals.
Trend Line Breaks
Trend lines can be drawn on ROC indicator just the same way trend lines can be drawn on price charts. Because The Rate of Change is a leading indicator, the trend lines on the indicator will be broken before those on the price charts. A trend line break on the Rate of Change is an indication of a bullish or bearish reversal signal.
- Bearish reversal- Rate of Change readings breaking above a downward Forex trend line warns of a likely bullish reversal.
- Bearish reversal- Rate of Change readings breaking below an upward trend line warns of a likely bearish reversal.
Rate of Change can be used to trade divergences, and to identify potential trend reversal signals. There are four types of divergences; classic bullish, classic bearish, hidden bullish and hidden bearish divergence.