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technical_indicators:rate_of_change_roc_and_momentum [2019/06/24 19:39] 127.0.0.1 external edit |
technical_indicators:rate_of_change_roc_and_momentum [2023/11/21 15:00] jayanthi [What Is the Rate of Change Indicator?] |
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| ====== Rate of Change (ROC) ====== | ====== Rate of Change (ROC) ====== | ||
| - | ===== Introduction ===== | + | ===== What Is the Rate of Change Indicator? ===== |
| - | The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a pure [[:technical_indicators:introduction_to_technical_indicators_and_oscillators#momentum_oscillators|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. The plot forms an oscillator that fluctuates above and below the zero line as the Rate-of-Change moves from positive to negative. As a momentum oscillator, ROC signals include centerline crossovers, divergences and overbought-oversold readings. Divergences fail to foreshadow reversals more often than not, so this article will forgo a detailed discussion on them. Even though centerline crossovers are prone to whipsaw, especially short-term, these crossovers can be used to identify the overall trend. Identifying overbought or oversold extremes comes naturally to the Rate-of-Change oscillator. | + | The Rate-of-Change (ROC) indicator, which is also referred to as Momentum, is a pure [[:technical_indicators:introduction_to_technical_indicators_and_oscillators#momentum_oscillators|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. The plot forms an oscillator that fluctuates above and below the zero line as the rate of change moves from positive to negative. As a momentum oscillator, ROC signals include centerline crossovers, divergences, and overbought-oversold readings. Divergences fail to foreshadow reversals more often than not, so we will forgo a detailed discussion of them. Even though centerline crossovers are prone to whipsaw, especially short-term, these crossovers can be used to identify the overall trend. Identifying overbought or oversold extremes comes naturally to the Rate-of-Change oscillator. |
| - | ===== Calculation ===== | + | ===== How To Calculate Rate of Change ===== |
| <code> | <code> | ||
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| The table above shows the 12-day Rate-of-Change calculations for the Dow Industrials in May 2010. The yellow cells show the Rate-of-Change from April 28th to May 14th. It is actually 13 trading days, but the close on the 28th acts as the starting point on the 29th. The blue cells show the 12-day Rate-of-Change from May 7th until May 25th. | The table above shows the 12-day Rate-of-Change calculations for the Dow Industrials in May 2010. The yellow cells show the Rate-of-Change from April 28th to May 14th. It is actually 13 trading days, but the close on the 28th acts as the starting point on the 29th. The blue cells show the 12-day Rate-of-Change from May 7th until May 25th. | ||
| - | ===== Interpretation ===== | + | ===== How To Interpret Rate of Change ===== |
| As noted above, the Rate-of-Change indicator is momentum in its purest form. It measures the percentage increase or decrease in price over a given period of time. Think of it as the rise (price change) over the run (time). In general, prices are rising as long as the Rate-of-Change remains positive. Conversely, prices are falling when the Rate-of-Change is negative. ROC expands into positive territory as an advance accelerates. ROC dives deeper into negative territory as a decline accelerates. There is no upward boundary on the Rate-of-Change. The sky is the limit for an advance. There is, however, a downside limit. Securities can only decline 100%, which would be to zero. Even with these lopsided boundaries, Rate-of-Change produces identifiable extremes that signal [[:glossary_o#overbought|overbought]] and oversold conditions. | As noted above, the Rate-of-Change indicator is momentum in its purest form. It measures the percentage increase or decrease in price over a given period of time. Think of it as the rise (price change) over the run (time). In general, prices are rising as long as the Rate-of-Change remains positive. Conversely, prices are falling when the Rate-of-Change is negative. ROC expands into positive territory as an advance accelerates. ROC dives deeper into negative territory as a decline accelerates. There is no upward boundary on the Rate-of-Change. The sky is the limit for an advance. There is, however, a downside limit. Securities can only decline 100%, which would be to zero. Even with these lopsided boundaries, Rate-of-Change produces identifiable extremes that signal [[:glossary_o#overbought|overbought]] and oversold conditions. | ||
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| Chart 6 shows ANF as a 10-day EMA (black) and the actual price plot is invisible. A 30-day EMA has been overlaid as a signal line. Furthermore, the 20-day Rate-of-Change is shown with a 5-day SMA to smooth out the fluctuations. There are fewer overbought and oversold readings using the 5-day SMA. Focusing only on the buy signals, the green dotted line shows when ROC exceeds -10% and the green arrow shows when the 10-day EMA crosses above the 30-day SMA. The oversold readings are usually early, but the moving average crossovers are usually late. Such is life with technical analysis. The point here is to reduce whipsaws by smoothing the data. A 10-day EMA was used because it is faster than a 10-day SMA. A 30-day SMA was used because it is slower than a 30-day EMA. Speeding up the shorter moving average and slowing down the longer moving average makes for slightly quicker signals. | Chart 6 shows ANF as a 10-day EMA (black) and the actual price plot is invisible. A 30-day EMA has been overlaid as a signal line. Furthermore, the 20-day Rate-of-Change is shown with a 5-day SMA to smooth out the fluctuations. There are fewer overbought and oversold readings using the 5-day SMA. Focusing only on the buy signals, the green dotted line shows when ROC exceeds -10% and the green arrow shows when the 10-day EMA crosses above the 30-day SMA. The oversold readings are usually early, but the moving average crossovers are usually late. Such is life with technical analysis. The point here is to reduce whipsaws by smoothing the data. A 10-day EMA was used because it is faster than a 10-day SMA. A 30-day SMA was used because it is slower than a 30-day EMA. Speeding up the shorter moving average and slowing down the longer moving average makes for slightly quicker signals. | ||
| - | ===== Conclusion ===== | + | ===== The Bottom Line ===== |
| - | The Rate-of-Change oscillator measures the speed at which prices are changing. An upward surge in the Rate-of-Change reflects a sharp price advance. A downward plunge indicates a steep price decline. Even though chartists can look for bullish and bearish divergences, these formations can be misleading because of sharp moves. Sustained advances often start with a big surge out of the gate. Subsequent advances are usually less sharp and this causes a bearish divergence to form in the Rate-of-Change oscillator. It is important to remember that prices are constantly increasing as long as the Rate-of-Change remains positive. Positive readings may be less than before, but a positive Rate-of-Change still reflects a price increase, not a price decline. Like all technical indicators, the Rate-of-Change oscillator should be used in conjunction with other aspects of technical analysis. | + | The Rate-of-Change oscillator measures the speed at which prices are changing. An upward surge in the Rate-of-Change reflects a sharp price advance. A downward plunge indicates a steep price decline. Even though chartists can look for bullish and bearish divergences, these formations can be misleading because of sharp moves. Sustained advances often start with a big surge out of the gate. Subsequent advances are usually less sharp, and this causes a bearish divergence to form in the Rate-of-Change oscillator. It is important to remember that prices constantly increase as long as the Rate-of-Change remains positive. Positive readings may be less than before, but a positive Rate-of-Change still reflects a price increase, not a price decline. Like all technical indicators, the Rate-of-Change oscillator should be used in conjunction with other aspects of technical analysis. |
| {{:technical_indicators:rate_of_change_roc_and_momentum:roc-7-orcldiverge.png|ROC - Chart 7}} | {{:technical_indicators:rate_of_change_roc_and_momentum:roc-7-orcldiverge.png|ROC - Chart 7}} | ||
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| </code> | </code> | ||
| - | For more details on the syntax to use for ROC scans, please see our [[docs>scans:indicators#rate_of_change_roc|Scanning Indicator Reference]] in the Support Center. | + | For more details on the syntax to use for ROC scans, please see our [[https://support.stockcharts.com/doku.php?id=scans:indicators#rate_of_change_roc|Scanning Indicator Reference]] in the Support Center. |
| ===== Further Study ===== | ===== Further Study ===== | ||