What is the “Berma Rate of Change”
It is an indicator to measure the "pure momentum of price movement". That is, determining the amount of strength of price movement regardless of whether the trend is up or down.
To understand the idea of "Pure Momentum", we can look at the following example.
If we assume that the price of a security has risen from ten to fifteen points.
According to the classic formula for measuring the "Rate of Change," we subtract the end point from the starting point to find the difference between them, then divide this difference by the starting point, and finally, multiply the result by one hundred, to get it as a percentage.
So, according to the previous formula, the rate of change in the price is fifty percent.
Now, if we assume that the price of this security fell from fifteen to ten points.
So, according to the same formula, the rate of change would be minus thirty-three percent.
Which raises a logical question, which is, how was the value of the upward rate of change greater than the downward rate of change, even though the distance was the same?
In this example, when prices went up by five points, the rate of change was fifty percent, but when prices fell by the same amount, the rate of change was only minus thirty-three percent.
This example illustrates one of the major drawbacks of the classic rate of change equation, which is the tendency or bias towards positive values. This makes the use of this indicator inaccurate in measuring the momentum of price movement.
So, I did a little tweaking of this equation, which eventually led to what is known as the “Berma Rate of Change”.
Instead of dividing by the starting point, as in the original equation, I divided by the midpoint between the beginning and the end. So, the denominator of the equation became balanced between rising and falling.
The first step in calculating the “Berma Rate of Change” is to determine the midpoint between the end and the beginning of the price movement.
The second step is to divide the difference between the end and beginning points by the midpoint.
The third and final step is to multiply by one hundred to convert the result into a percentage.
Also, the previous equation can also be solved as shown below.
Bitcoin Example.
Below, my friend, I will explain the difference between the two equations on the Bitcoin chart.
From the chart, we see that when Bitcoin rose from thirty-five thousand to sixty-four thousand dollars, the classical rate of change reached 82.8 percent.
However, when Bitcoin fell the same distance again, the classical rate of change dropped to only minus 45.3 percent.
This raises a logical question: How could the upward rate of change be greater than the downward rate of change, even though the distance is the same?
The answer, as we mentioned before, is that the classical rate of change equation tends to be biased towards positive values.
If we calculate the “Berma Rate of Change” for the same distance, we will find that Bitcoin has risen by 58.6 percent.
Likewise, we will find that Bitcoin has fallen by minus 58.6 percent.
That is, the amount of the rise is equal to the amount of the fall, so that their sum is equal to zero, because the "Berma Rate of Change" formula is considered a balanced one, and it achieves the principle of "Pure Momentum", which we talked about at the beginning of this lesson.
At The End.
With this, my friend, we have basically learned about the “Berma Rate of Change”, which is considered one of the effective alternatives for measuring the momentum of price movement.
Now, let us move on to the next topic.
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