Price Rate of Change (ROC):
As you know, prices drop and grow in ondulatory way, in cycles. This cyclic movement is a result of change in investors' expectations and the price control fight between bulls and bears.
Price Rate of Change (ROC) reflects this ondulatory movement like an oscillator, measuring the difference in prices in a certain period. ROC grows if prices grow and drops along with them. The more the price change is, the more ROC changes.
12- and 25-day ROC are most widely spread. A 12-day ROC is a perfect short-term and medium-term indicator of overbought/oversold.
The higher ROC is, the more probable the rise. However, like in the case of using all other overbought/oversold indicators, you should not hurry to open a position until the market changes its direction (turns up or down). The market that seems to be outbidden can remain so for some time. In general, the state of utmost overbought/oversold usually assumes an extension of the current trend.
Author: MetaQuotes Software Corp.
Generally, the Rate of Change is calculated based on 14-periods for input n, but of course can be modified to any trader preferred period. A
chart of the Nasdaq 100 ETF (QQQQ) is shown below with the 14-day Rate of Change
The right side of the chart of the QQQQ's shows how the Rate of Change is
calculated. The closing price on Day #14 was divided by the closing price
14-days ago on Day #1 which netted 1.0467. One was then subtracted to get .0467
and then it was multiplied by 100 to get 4.67. That means there was a 4.67%
increase in the price of the QQQQ's over the 14-day period highlighted in the
The Rate of Change indicator can be used to confirm price moves or detect
divergences and can be used as a guide for determining overbought and oversold
An example of the ROC indicator confirming price action occurred from Low #1
to Low #2: the stock price of the QQQQ's made higher lows, generally a bullish
sign; likewise, the Rate of Change indicator confirmed price action and made
higher lows as well.
In the chart above, when the Rate of Change indicator surpassed the +3% mark,
it would have been inadvisable to buy, as prices were in an overbought area;
looking for sell signals would be more advisable. Similarly when the ROC entered
oversold areas, it would not be smart to sell, as most of the downward move had
been made, rather buy signals should be sought.