Rate of Change Analysis & Rate of Change 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 chosen 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 & 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.

Technical Analysis & Generating Signals

Rate of Change indicator can be used to generate signals using a number of techniques, the most common ones are:

Stock Crossover Trade Signals

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 zero center line.

Oversold/Overbought Levels:

Overbought - The higher the reading the more overbought a instrument is. Values that are above the overbought level imply that a price is overbought and there is a pending price correction

Oversold - The lower the reading the more oversold a instrument is. Values below the oversold level imply that a instrument is oversold and there is a pending price rally.

However, during strong trending markets the price will remain in the Oversold/Overbought 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 & sell signals.

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 trend lines on the indicator will be broken before those on the price charts. A trendline 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 trendline warns of a likely bullish reversal.
• Bearish reversal- Rate of Change readings breaking below an upward trendline warns of a likely bearish reversal.

Divergence Stocks

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.