Rate of Change Analysis and 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 using Points or Percentages. ROC moves in an oscillation manner, where it oscillates above & below a zero centerline level. Levels above zero are bullish while those below zero centerline level are bearish.
The greater the changes are in the prices the greater the changes in the ROC.
Forex Analysis and Generating Signals
ROC indicator can be used to generate trading signals using a number of methods, the most common ones are:
Forex Cross over Signals
Bullish Signal - buy trade signal gets generated when ROC indicator crosses above zero center line
Bearish Signal - sell signal gets generated when Rate of Change crosses below the 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 overbought & there's a pending price correction
Oversold - The lower the reading the more oversold 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 market price reversing the market trend will continue for quite some time. It is hence best to use the cross-over signals as the official buy & sell signals.
Forex Trend Line Breaks
Trend-Lines can be drawn on ROC trading indicator just the same way trendlines can be drawn on price charts. Because The Rate of Change is a leading technical indicator, the trendlines on the trading indicator will be broken before those on the price charts. A trend line break on the ROC is an indication of a bearish or bullish reversal setup.
- Bearish reversal- Rate of Change readings breaking above a downwards trendline warns of a likely bullish reversal.
- Bearish reversal- Rate of Change readings breaking below an upward trend line warns of a likely bearish reversal.
Divergence Trading
ROC can be used to trade divergences, and to identify potential trend reversal signals. There are 4 types of divergences: classic bullish, classic bearish, hidden bullish and hidden bearish divergence.
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