Rate of Change Technical Analysis & Rate of Change Trading Signals
Rate of Change indicator is used to calculate how much price has changed within a specified number of trading price periods. It calculates the difference between the current candlestick and the price of a specified number of prior candles.
The difference can be calculated using Points or Percents. Rate of Change moves in an oscillation manner, where it oscillates above & below a zero center-line 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.
Stock Technical Analysis & How to Generate Signals
Rate of Change indicator can be used to generate signals using a number of methods, the most common ones are:
Stock Indices Cross Over Trade Signals
Bullish Signal - buy signal is generated when the ROC crosses above the zero center line
Bearish Signal - sell signal is generated when the Rate of Change crosses below the zero center line.
Overbought/Oversold Levels:
Overbought - The higher the reading the more overbought indices is. Values that are above the overbought level imply that a trading 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 Overbought/Oversold Levels for a long time, & rather than the price reversing the price trend will continue for quite some time. It is therefore best to use the crossover signals as the official buy and sell stock trading signals.
Indices Trend Line Breaks
Indices Trend lines can be drawn on ROC indicator just the same way trend lines can be drawn on price charts. Because The Rate of Change is a leading indicator, the trendlines 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 trade signal.
- Bearish reversal- Rate of Change readings breaking above a downward trend line warns of a likely bullish reversal.
- Bearish reversal- Rate of Change readings breaking below an upwards trend line warns of a likely bearish reversal.
Divergence Trading
Rate of Change can be used to trade divergences, and to identify potential trend reversal trading signals. There are four types of divergences: classic bullish, classic bearish, hidden bullish and hidden bearish divergence.
