A Macro-level Analysis Tool
A good investor has an entire tool belt full of technical analysis tools that they can use to predict market trends. Sometimes they need to use tools that target specific financial data, or well-defined periods of time, in order to identify small market fluctuations and infer what will happen next.
Other times they need a simple tool that can describe market behaviour on a larger scale. The Price Rate of Change (ROC) indicator is one such tool.
What is the ROC Indicator?
The rate of change oscillator is one of the simpler technical indicator tools at an investor’s disposal. The ROC measures the percentage change in a stock’s price over a user-defined period of time. The period of time used in the equation is at the discretion of the analyst.
The ROC works by comparing a stock’s closing price from however many periods ago that you wish to measure to its closing price now. That change is then plotted against a zero line from which trends, momentum, reversals, and overall market behaviour can be inferred. Click this link to access an economic calendar for your trading strategies
What is the ROC Indicator Used For?
The ROC tool be used to describe high-level market behaviour. Some of the information that it can provide to an investor is:
- A stock’s momentum
- Overbought/ Oversold conditions
- Divergences
The ROC indicator primarily shows a stock’s momentum, or its buying and selling pressure. If the indicator produces values above the zero line, there is buying pressure, or positive momentum. Below the zero line indicates selling pressure, or negative momentum.
The ROC’s ability to detect overbought and oversold levels, as well as divergences, is dependent on each individual stock. Investors can compare the current rate of change versus the historical rate of change to determine when a stock’s percentage change exceeds an extreme threshold. Values above or below this threshold indicate overbought and oversold conditions.
Divergences are noted when the stock’s momentum begins to reverse sharply in the other direction, signaling a larger shift in the stock’s market behaviour over time.
How do I use the ROC to My Advantage?
The price ROC indicator is highly adaptable to each individual investor’s needs. It can be used to track price changes over short-term or long-term periods. Bear in mind that the information gained from this indicator is only as meaningful as the time period used.
To gain deeper market insights, it may be necessary to compare the ROC over different periods of time in order to weed out false signals and incorrect inferences. At the very least, this indicator is useful in identifying general price momentum, trends and reversals, and bear or bull biased market conditions.
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