ROC is a non-banded oscillator.
It tracks if the speed of a trend is accelerating, slowing down or maintaining the same speed.
It tracks the relationship between the 2-period closing prices.
In a standard calculation, the period is 12 days.
It considers 12 days back closing price and gets it subtracted from its current closing price.
]The difference is plotted or accepted as ROC.
It can be sometimes a positive figure and sometimes a negative figure.
Hence a central reference line is plotted as zero.
You can do Technical Trading Strategies with ROC Indicator to know about the use of ROC in developing trading strategies.
ROC = [(Close – Close n periods ago) / (Close n periods ago)] * 100
Trading Rules and Interpretation:
1. Once ROC is above the zero line and keeps on rising, it shows that the trend is not only up but the speed of the uptrend is accelerating.
2. When the Rate of Change is above zero line but falling, it shows that the speed of the uptrend is slowing down.
3. When the Rate of Change is above zero and again starts rising and crosses the previous top, it shows that the uptrend is very much in its speed.
4. When Rate of Change is below zero line but falling, it shows that downtrend is increasing its speed.
5. When Rate of Change is below zero but starts rising upward, it shows that the speed of the downtrend is slowing down.
6. If Rate of Change is below zero and starts falling, it shows that the downtrend has accelerated its speed once again.
Trading strategies using ROC (Rate of Change)
ROC is a very simple strategy which states that whenever the Rate of Change goes above zero line from below, it states a positive momentum while when the ROC goes below zero line from above; it generates a negative momentum in the price.
However, in order to generate a more confirmed signal, we can incorporate moving average. We are taking a combination of 5 and 30 moving average and ROC to enter the trades.
The image above is the chart of Reliance Capital and we can see that whenever 5 DMA is above 30 DMA and whenever the ROC went above the zero line from below, you should go long.
Case 1: We took a long position at the level of 410 when ROC went above the zero line and made an exit when the Rate of Change went below the zero line at 440 (approx), making a profit of 30 points.
Case 2: Again a buy signal was made at 445-450 (approx) when the ROC went above the zero line and 5 DMA was above the 30 DMA and the exit was made at 555-560 when Rate of Change went below the zero line.
Case 3: Next when ROC went below the zero line and 5 DMA was below 30 DMA at 550, a sell signal was generated. This position was squared off at 440 when the Rate of Change went above the zero line.
Few traders also use ROC to identify extremes and forecast turning points. However, ROC being a non-banded indicator, it’s better to look overbought and oversold indication based on other indicators like Stochastic or RSI.
ROC basically measures the speed at which there is a change in price movement. Though traders also look for positive and negative divergence, it may be misleading in ROC due to sharp moves.