Rate of change (ROC) is a technical indicator of momentum that measures the percentage change in price from period to period.
Momentum is a crucial component of technical analysis because the speed of a price change can signal potential trend shifts.
What is the ROC (Rate of Change) indicator?
ROC measures the amount a security’s price has changed over a defined period.
The rate of change indicator is sometimes called the momentum indicator because of its simplicity and sole focus on price momentum.
A price change’s velocity tells different information than the actual price change itself. For example, a security’s price could increase by $1 per day for four consecutive days. Although the price change is consistent, momentum is slowing as the price increases.
ROC has a similar “drop-off effect” to the simple moving average because older data points are removed from the calculation and replaced with new data points.
ROC can be calculated over multiple periods to assess momentum over time. Because short-term momentum changes lead to longer-term momentum changes, the rate of change over a short look-back period may be an early indicator for longer-term timeframes.
How is ROC calculated?
To calculate the ROC, compare today’s price to the price a certain number of days ago.
There are several variations of the ROC calculation depending on the charting software used, but they all follow the same basic approach and have the same interpretation.
The ROC oscillates around a midline. If the current price is greater than the previous price, the ROC increases.
Like the MACD indicator, ROC is an unbounded oscillator because momentum can continue to trend higher. Shorter look-back periods create a more sensitive ROC line while longer lookback periods create a smoother, less volatile line because more data points are used.
ROC entries and exits
A positive ROC indicates an uptrend, while a negative ROC signals a downtrend. Changes in the ROC’s direction (positive to negative or negative to positive) are often used for trading signals. Crossovers of the midline indicate a change in trend.
Like other oscillators, ROC is most useful in sideways markets as zig-zag-like price movements create a lot of opportunities for entries and exits. Traders may use trendlines on the ROC to identify peaks and troughs in momentum and look for divergences between momentum and price.
Using the ROC with other indicators
The rate of change is often used to confirm trends. When the ROC is in sync with price changes, momentum confirms the price action. Divergences tell an equally important story.
For example, when a security reaches a new high but the rate of change does not, there is a negative divergence between price and momentum. This could signal resistance and a potential price reversal.
Using the ROC with other indicators can be a leading indicator. For example, an overbought RSI condition coupled with falling ROC may be used as a sell indicator because it signals that the upward price momentum is waning.