Oscillator Indicator: Smoothed Rate of Change (S-RoC)
Smoothed Rate of Change (S-RoC) is a refinement of the Rate of Change (RoC) indicator developed by Fred G Schutzman. This indicator is different from RoC because it is based on some exponential moving averages (EMAs) rather than closing prices. Like RoC, Smoothed RoC is a leading momentum indicator that can be used to determine the strength of a trend. That is to determine whether the trend is accelerating or slowing down. S-RoC does this by comparing the current EMA with the value determined by the EMA of a certain period ago. So, the 7-day S-RoC compares the current EMA with the EMA value seven days ago. The use of EMA rather than the close price is able to explain the erratic trend of RoC.
First, the EMA is calculated. Second, EMA change momentum is calculated by subtracting the previous EMA value from current EMA. Third, the result is divided by the previous EMA value and multiplied by 100 to give a percentage.
Since S-RoC is RoC of EMA, it takes two parameters: EMA period with default to 13; and the RoC period, with a default of 21. The formula is:
S-RoC = (current EMA – previous EMA) / (previous EMA) x 100
The previous EMA was the value of EMA in the past period.
The result is a percentage that is plotted as an oscillator that oscillates between 100% and -100%.
Like the RoC oscillator, the main consideration when using S-RoC is its midline. When the underlying pair price is in an ascending trend, a buy signal is generated when S-RoC falls below its midline and starts back up. When the underlying pair price is in a downward trend, a sell signal is generated when S-RoC moves above its midline and starts to turn down again.
Divergences can also be considered. The bullish divergence occurs during a downtrend when the price makes a lower low but S-RoC makes a lower low. This indicates that there is a weakening in downtrend motion and a trend reversal is very likely. On the contrary, a bearish divergence occurs when the price makes a higher price higher but S-RoC makes the lower price higher. This indicates a weakening in the uptrend and a trend reversal is very likely.