What Is the Price Rate of Change (ROC) Indicator?
The Price Rate of Change (ROC) is a momentum-based technical indicator that calculates the percentage change in price between the current price and the price from a set number of periods in the past. The ROC is plotted on a chart with a zero line, where the indicator moves above zero into positive territory if prices are rising, and below zero into negative territory if prices are falling.
Traders use the ROC to identify potential divergences, overbought or oversold conditions, and centerline crossovers, which can signal potential shifts in market momentum.
Formula for the Price ROC Indicator
The formula for calculating the Price Rate of Change (ROC) indicator is as follows:
This formula measures the percentage change in price over the last n periods, where n is the number of periods chosen by the trader or analyst. The result helps in identifying price momentum, with positive values indicating upward momentum and negative values indicating downward momentum.
How to Calculate the Price ROC Indicator
The key step in calculating the Price Rate of Change (ROC) indicator is selecting the “n” value, which represents how many periods ago the current price is being compared to. Short-term traders often choose smaller values, such as 9, while long-term investors may opt for larger values, such as 200. Smaller values make the ROC more sensitive to price changes, resulting in quicker reactions but potentially more false signals. Conversely, larger values result in slower reactions, but the signals may be more reliable when they occur.
Steps to Calculate the Price ROC:
1. Select an “n” value: This could be any number, such as 12, 25, or 200. Short-term traders typically use a smaller “n” value, while long-term investors use a larger one.
2. Find the most recent closing price: Identify the closing price of the latest period.
3. Find the closing price from “n” periods ago: Look for the closing price from the period that occurred “n” periods ago.
4. Apply the ROC formula: Plug the values from steps two and three into the ROC formula.
5. Update the ROC: As each new period ends, calculate the updated ROC value to maintain the indicator’s relevance.
What Does the Price ROC Indicator Tell You?
The Price Rate of Change (ROC) is considered a momentum or velocity indicator because it measures the speed and strength of price movement by tracking the rate of change. For example, if a stock’s closing price today is $10, and the closing price five trading days ago was $7, the five-day ROC would be 42.85, calculated as:
Like other momentum oscillators, the ROC appears in a separate window beneath the price chart. It is plotted against a zero line, where values above zero indicate positive momentum (buying pressure), and values below zero indicate negative momentum (selling pressure). When the ROC value moves further from the zero line in either direction, it signals increasing momentum. Conversely, when the value moves back toward zero, it suggests diminishing momentum.
Zero-Line Crossovers:
When the ROC crosses the zero line, it can signal potential trend changes. The timing of these signals depends on the selected “n” value. A small “n” value generates earlier signals, which might result in more frequent but less reliable signals, while a larger “n” value produces signals later in the trend change but may be more reliable. However, ROC is prone to false signals, or “whipsaws,” around the zero line, so this signal is often used as an early alert rather than a concrete trading trigger.
Overbought and Oversold Levels:
Traders often use overbought and oversold levels with the ROC, but these levels are not standardized and vary depending on the asset being traded. By analyzing historical ROC levels that have coincided with price reversals, traders identify specific thresholds that could signal an imminent reversal. When ROC reaches these extreme levels again, traders closely monitor the price for confirmation of the signal before making trading decisions.
Divergence:
ROC is also commonly used to identify divergence, which can signal potential trend changes. Divergence occurs when the price of an asset moves in one direction while the ROC moves in the opposite direction. For example, if the price is rising but the ROC is falling, this indicates bearish divergence, suggesting a potential trend reversal to the downside. Similarly, if the price is falling and the ROC is rising, this indicates bullish divergence, suggesting a potential upward reversal. However, divergence is often a poor timing indicator, as it can last for extended periods and does not always lead to an immediate price reversal.
Price ROC Indicator vs. Momentum Indicator
The Price Rate of Change (ROC) and Momentum indicators are very similar in concept and calculation, and they often yield comparable results if the same “n” value is used for both. The main distinction between the two lies in how they express the change in price.
The Price ROC indicator divides the difference between the current price and the price from “n” periods ago by the price from “n” periods ago, thus producing a percentage value. This percentage-based result helps traders easily compare price changes across different assets, regardless of their price levels.
In contrast, the Momentum indicator typically does not convert the result into a percentage. Most versions of the momentum calculation either:
1. Simply multiply the difference between the current price and the price from “n” periods ago by 100, or
2. Divide the current price by the price from “n” periods ago and then multiply by 100.
While both indicators essentially highlight price momentum and tell similar stories, the way the results are presented may lead some traders to prefer one over the other. Depending on the method used, the two indicators can produce slightly different readings, but the overall conclusions about momentum strength and direction are often aligned.
Formula for the Momentum Indicator:
Where:
- {Closing Price}_p = Closing price of the most recent period.
- {Closing Price}_{p - n} = Closing price “n” periods before the most recent period.In this formula, the momentum indicator compares the current price to the price from “n” periods ago and multiplies the ratio by 100. This result provides traders with a value that represents the magnitude of price change over the specified number of periods, without converting it into a percentage as the ROC does.
Both indicators are widely used to assess momentum and price strength, and they can help traders identify potential trend continuations or reversals. Depending on individual preferences, traders may opt to use one over the other, but both serve as valuable tools in momentum analysis.
Conclusion:
Both the Price ROC (Rate of Change) and Momentum indicators serve as powerful tools for measuring price momentum and trend strength in the markets. While they are conceptually similar, the key difference lies in their calculation and presentation: the ROC expresses price changes as a percentage, making it more intuitive for comparing across different assets, whereas the Momentum indicator provides an absolute or ratio-based result, which some traders might prefer for its simplicity.
Both indicators are valuable for identifying overbought or oversold conditions, detecting divergences, and signaling potential trend reversals. Ultimately, the choice between the two depends on trader preference, with each offering a slightly different perspective on price movement but generally conveying similar insights regarding market momentum.
