Rate of Change (ROC)

Definition:

 

Rate of Change measures the percent change in the price movements over a period of time. This is represented by the formula:

(Current Price – Price n periods ago) / (Price n periods ago)

Interpretation:

The conventional interpretation is to use momentum as a trend-following indicator. This means that when the indicator peaks and begins to descend, it can be considered a sell signal. The opposite conditions can be interpreted when the indicator bottoms out and begins to rise.

 

For the most part, price and ROC should move together. When the price and ROC diverge, look for the ROC to be a clearer indication of the underlying momentum of the trend.

 

If momentum reaches very high or low values relative to its range historically, a continuation of the current trend is likely, and a change might not be considered until the actual price begins to dip down or rise, respectively.

 

 

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