Rate of Change Analysis & 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 selected 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.

Stock Analysis & Generating Signals

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

Stock Cross-over Trade Signals

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

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

Overbought/Oversold Levels:

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

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

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

Trend Line Breaks

Stock 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 trend-lines on the indicator will be broken before those on the price charts. A stock trend line break on the Rate of Change is an indication of a bullish or bearish reversal stock trade signal.

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

Divergence Trading

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