The Rate of Change (ROC) is a momentum-based technical indicator that measures the percentage change in price between the current price and the price a certain number of periods ago. The ROC indicator is plotted against zero, with the indicator moving upwards into positive territory if price changes are to the upside, and moving into negative territory if price changes are to the downside.
The indicator can be used to spot divergences, overbought and oversold conditions, and centre line crossovers.
An ROC reading above zero is typically associated with a bullish bias.
An ROC reading below zero is typically associated with a bearish bias.
Closing Price p = Closing price of most recent period
Closing Price p−n = Closing price n periods before most recent period
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The Rate of Change (ROC) is basically classified as a technical momentum indicator for stock price movements as it measures the intensity of changes in price movements. For example, if a stock’s price at the close of trading today is Rs.100, and the closing price five trading days prior was Rs.70, then the five-day ROC is 42.85, calculated as
( ( 100 – 70 ) / 70 ) * 100 = 42.85
The Rate-of-Change oscillator measures the speed at which prices are changing and it is generally calculated for 12 periods. An upward move in the Rate-of-Change reflects a sharp price increase whereas a downward move indicates a steep price decline.
ROC indicator falls as prices tend to decline and as the prices fall rapidly, it declines at a faster rate and as soon the intensity of price decline decreases, it starts increasing and corrects back to zero levels indicating the trend reversal.
Similarly ROC increases due to increase in prices and then increases at a faster rate when prices tend to grow rapidly and then when there is decline in rate of upward movement in prices, it starts falling back to it zero levels as the prices are close to its top level.
Rate-of-Change indicator tends to move in correlation with price movements and that is the reason it is preferred to use it as a indicator for reasonable time-frame.
Like all technical indicators, the Rate-of-Change oscillator should be used in conjunction with other aspects of technical analysis.