Rate of Change Analysis & Rate of Change Trading Signals

Rate of Change indicator is used to calculate how much crude price has changed within a specified number of crude price periods. It calculates the difference between the current candlestick and the crude 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 crude prices the greater the changes in the ROC.

Crude Analysis & Generating Trade Signals

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

Oil Cross Over Trade Signals

Bullish Signal - buy oil 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 oil is. Values that are above the overbought level imply that a price is overbought and there is a pending crude price correction

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

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

Trend Line Breaks

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

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.