Rate of Change Technical Analysis and Rate of Change Trading Signals

Rate of Change ROC indicator is used to calculate how much price has changed within a specified number of price periods. It calculates the difference between the current candlestick and the price of a chosen number of previous candles.

The difference can be calculated using Points or Percents. Rate of Change moves in an oscillation manner, where it oscillates above & below a zero center-line level. Levels above zero are bullish while those below zero center-line level are bearish.

The greater the changes are in the prices the greater the changes in the ROC.

Commodity Analysis & Generating Trade Signals

Rate of Change indicator can be used to generate signals using a number of methods, the most common ones are:

Commodity Trading Cross Over Trading Signals

Bullish Signal - buy signal is generated when the ROC crosses above the zero center line

Bearish Signal - sell signal is generated when the Rate of Change crosses below the zero center line.

Oversold/Overbought Levels:

Overbought - The higher the reading the more overbought a commodity instrument is. Values that are above the overbought level imply that a commodities price is overbought and there is a pending commodities price correction

Oversold - The lower the reading the more oversold a commodity instrument is. Values below the oversold level imply that a commodity instrument is oversold and there is a pending commodities price rally.

However, during strong trending markets the price will remain in the Oversold/Overbought Levels for a long time, and rather than the price reversing the price commodity trend will continue for quite some time. It is therefore best to use the crossover signals as the official buy & sell trading signals.

Trend Line Breaks

Trend lines can be drawn on ROC indicator just the same way trend lines can be drawn on price charts. Because The Rate of Change is a leading indicator, the commodity trend-lines on the indicator will be broken before those on the price charts. A commodity trend line break on the Rate of Change is an indication of a bullish or bearish reversal commodities signal.

• Bearish reversal- Rate of Change readings breaking above a downwards trendline warns of a likely bullish reversal.
• Bearish reversal- Rate of Change readings breaking below an upward trendline warns of a likely bearish reversal.

Divergence Commodity

Rate of Change can be used to trade divergences, and to identify potential trend reversal signals. There are four types of divergences: classic bullish, classic bearish, hidden bullish and hidden bearish divergence.