Oscillator Indicator: Rate of Change (RoC)
Rate of Change (RoC) is similar to Momentum oscillator (MTM) as it is a simple momentum indicator that measures speed, where trends accelerate or slow down. This RoC indicator is obtained by comparing the latest price close to the closing price (close) of a certain period in the past. Thus, RoC-7 day compares the last closing price with the closing price seven days ago. Like the MTM indicator, RoC tends to be erratic as it is very sensitive to changes in the last closing price and the closing price of the specified period.
RoC is calculated in two stages. First, momentum is calculated by subtracting the previous closing price from the last closing price. Then the result is divided by the previous closing price and multiplied by 100 to give a percentage.
The formula is:
ROC = [(CurrentClose - Close n periods ago) / (Close n periods ago)] X 100
Where the previous closing price is the initial closing price determined by the trader. The result is a percentage that is plotted as an oscillator that is 100% and -100% oscillator.
Like the momentum oscilator, the main consideration when using RoC is the midline. When the underlying pair’s price is in an uptrend, a buy signal is generated when RoC falls below its midline and starts to turn up. When the underlying pair price is in a downward trend, a sell signal is generated as the RoC moves above its midline and starts to reverse down.
In sideways (non-trend) markets, overbought and oversold references are the main considerations. However, the reference line should be drawn manually around the extreme areas of RoC.
As a general rule, RoC should not spend more than 5% of the time above or below the reference line. When the underlying pair is in range, a sell signal is generated when RoC moves out of the overbought area over the top reference line. Similarly, a buy signal is generated when RoC moves out of the oversold area from below the lower reference line.
An entry signal is also generated when the trend line drawn on RoC is violated.