Rate of Change Technical Analysis & Rate of Change Signals

Rate of Change is used to calculate how much price has changed within a specified number of trading price periods. It calculates the difference between the current candle and the price of a specified number of prior candles.

This difference can be calculated and measured using Points or Percents. ROC moves in an oscillation manner, where it oscillates above and below a zero centerline level. Levels above zero are bullish while those below zero center-line level are bearish.

The greater the changes are in the trading prices the greater the changes in the ROC Rate of Change.

Rate of Change - ROC, ROC Analysis

Stock Technical Analysis and How to Generate Trading Signals

ROC indicator can be used to generate signals using a number of methods, the most regular ones are:

Stock Index Cross-Over Signals

Bullish Signal - buy signal gets generated when the ROC crosses above zero center line

Bearish Signal - sell signal gets generated/derived when the Rate of Change crosses below the zero center line.

ROC, Rate of Change Analysis

Overbought/Over-sold Levels:

Overbought - The higher the reading the more overbought indices is. Values that are above the over-bought level imply that a price is overbought and there is a pending price correction

Oversold - The lower the reading the more oversold indices is. Values below the oversold level imply that indices is oversold and there is a pending price rally.

However, during strong trending markets the price will remain in the Over-bought/Oversold Levels for a long time, & rather than the price reversing the price trend will continue for quite some time. It is thence best to use the crossover signals as the official buy & sell stock signals.

Indices TrendLine Breaks

Index Trend-lines can be drawn on ROC trading indicator just the same way trendlines can be drawn on price charts. Because The ROC is a leading indicator, the trend-lines on the indicator will be broken before those on the price charts. A trend line break on the Rate of Change is an indication of a bullish or bearish reversal signal.

Bearish reversal- ROC values breaking above a downward trendline warns of a likely bullish market reversal.
Bearish reversal- Rate of Change values/readings breaking below an upwards trend line warns of a likely bearish market reversal.

Divergence Trading

Rate of Change can be used to trade divergences, and to identify the potential price trend reversal trading signals. There are four types of divergence-setups: classic bullish, classic bearish, hidden bullish & hidden bearish divergence.

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