Rate of Change Analysis & Rate of Change Signals
Rate of Change, ROC trading indicator is used to calculate how much price has changed within a specified number of price periods. It calculates the difference between the current candle and the price of a specified number of previous candlesticks.
The difference can be calculated and measured using Points or Percentages. ROC moves in an oscillation kind of manner, where it oscillates above & 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 Rate of Change.
FX Analysis & Generating Signals
ROC can be used to generate trading signals using a number of methods, the most regular ones are:
Forex Crossover Signals
Bullish Signal - buy trade signal gets derived and generated when ROC crosses above zero center line
Bearish Signal - sell signal gets derived/generated when Rate of Change crosses below zero center line.
Overbought/Oversold Levels:
Overbought - The higher the reading the more overbought a currency pair is. Values that are above the overbought level imply that a currency is over-bought and there's a pending price correction
Oversold - The lower the reading the more over-sold a forex pair is. Values below the oversold level imply that a currency is oversold and there's a pending price rally.
However, during strong trending markets the price will remain in the Overbought/Over-sold Levels for a long time, and rather than the price reversing the market trend will continue for quite some time. It is hence best to use the crossover signals as the official buy & sell signals.
Forex TrendLine 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 trendlines on the indicator will be broken before those on the price charts. A trendline break on the ROC is an indication of a bearish or bullish reversal setup.
- Bearish reversal- Rate of Change values/readings breaking above a downwards trend-line warns of a likely bullish reversal.
- Bearish reversal- Rate of Change values/readings breaking below an upward trendline warns of a likely bearish reversal.
Divergence Trading
ROC can be used to trade divergences, and to identify the potential trend reversal signals. There are 4 types of divergences: classic bullish, classic bearish, hidden bullish and hidden bearish divergence.
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