ROC Rate of Change

Stock and Share Technical Analysis


ROC stands for Rate of Change, and is one of the most well-known and popular of stock and share technical indicators. The ROC indicator is an momentum or velocity oscillator, with its movement oscillating around a central zero-point level. As with many technical indicators, a set period is used to compare with today's price. This period can be as small as 1 day or as large as 200 days or more, but the most typical periods used are 10, 12 or 25 days.

Calculation of the ROC Indicator

The ROC is calculated by looking at today's price and comparing this with the price at so-many days ago, depending on the period used. It can be expressed as a simple price-difference figure, or as a percentage-change figure. Whichever was is used, the Rate of Change indicator will be positive, negative or zero.

Calculation of the ROC as a simple price-difference figure as very easy - just look at today's closing price, deduct the closing price so-many days ago (depending on period used), and voila, you have the ROC figure.

To obtain the Rate of Change indicator as a percentage, the following calculation is used:
ROC=((today's closing price - closing price at [period number of days ago]) closing price at [period number of days ago]) x 100

Interpretation of the Rate of Change Technical Indicator

The Rate of Change Indicator can give a good idea of a stock, share or market's cyclical pattern of movement upwards and downwards, and the graphical display of ROC can be a way to identify these cycles better than just looking at the share price graph alone. When it comes to interpretation for buying or selling decisions, analysts consider that a ROC indicator which is is at a high peak and starting to move down is an indication of a sell signal, whereas an ROC at a low peak, but staring to move upwards, is a buy signal. This is due to the theory that the higher the ROC, the more overbought the stock or share is, and the lower the ROC, the more oversold it is likely to be. It is also based on the idea that movement toward the zero line indicates that the existing trend is losing momentum. The best overbought or oversold levels are likely to vary depending on the stock or share under study, so it is a good idea to look at past patterns to assist in making a decision regarding a particular stock. In very strong upwardly trending bull markets it may be advantageous to use higher and lower peaks than in times of a weaker market.

Although more difficult to identify, divergences between the ROC trend and the stock price can be helpful in interpretation, with the movement of ROC and price in opposite directions considered to be a sign of a possible reversal of the stock price trend.

Some analysts also use the zero level as a basis of buy or sell decisions - buying when the stock moves from below the zero line to above, and selling when the stock moves from above to below the zero mark. However, other market technicians may consider this to be a slight over-simplification of ROC interpretation.

More Technical analysis articles by Pandacash:

Moving Average MFI - Money Flow Index Exponential Moving Average
RSI - Relative Strength Index Moving Average Envelopes ROC - Rate of Change
Fast and Slow Stoch Stochastics W%R - Williams' %R MACD
Standard Deviation Definition and Usage Calculation of Standard Deviation Normal Distribution and Standard Deviation

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