Rate of Change - ROC

What

The Rate of Change (ROC) indicator is a very simple yet effective momentum oscillator that measures the percent change in price from one period to the next. The ROC calculation compares the current price with the price n periods ago. It is similar to the momentum indicator in that it directly measures market movement. The advantage of the percentage change calculation is that it is not sensitive to different absolute price levels. We are in fact measuring the percentage change, not the absolute change.

How

Rate of Change = ((Price c / Price c-n) * 100) - 100

Price c = close price

Price c-n = the close price n number of periods prior

 n = a period specified by the user

When

The indicator is an oscillating indicator and can therefore be used as an overbought and oversold type indicator as it peaks. Traders must exercise caution however as a trending market will result in the indicator remaining in an overbought or oversold state for an inordinate amount of time, depending on the direction of the trend. It is therefore suggested that this indicator be used in conjunction with another indicator that will determine if and when the market is actually trending or trading sideways.

There are a few ways that traders use this indicator. One is as an overbought/oversold indicator. Another is to use it simple as an indication of change of direction. Yet another is to use the movement through the zero line as a trigger to buy and sell. That is to buy when the indicator moves from below the zero line to above the zero line and sell when the indicator moves from positive to negative.