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What Is Rate of Change Indicator

11 Aug 2023

Introduction

  • Price trends of financial securities are crucial for investors to analyze and understand whether to purchase, sell, or keep holding.
  • The rate of change, or ROC, indicator helps investors obtain and understand the key price trends of financial security.
  • These trends can be easily interpreted and offer a lot of insight.

What are the Components of the ROC Indicator?

  • The ROC indicator is a technical indicator that depicts the percentage change in the price of financial security between two set periods of time (current and historical).
  • The indicator has a zero line, which indicates no change in prices, and two regions, i.e., negative and positive.
  • An increase in price leads to the movement of the indicator towards the positive region, and a decrease leads to the negative region.

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How Do I Use the ROC Indicator?

The ROC indicator works in the following way:

  • It utilizes the current price of the financial security and the price in the last closing period, i.e., 12 days ago.
  • The difference between the two prices is the rate of change, which can be positive, negative, or zero.
  • The formula for calculating the rate of change is:

    Rate of Change: { (CCP-HCP)/CPA }*100

Here, CCP stands for the current closing price, and CPA stands for the historical closing price.

What are the Key Interpretations of the ROC Indicator?

An investor can utilize the rate of change to decide whether to sell, purchase, or hold using the ROC indicator. Some key interpretations are given below:

  • The movement of the ROC towards the positive region indicates an uptrend in the price of financial security, and vice versa for the negative region.
  • If the movement of the ROC towards the positive or negative region is falling, it indicates that the uptrend or the downtrend is becoming static.
  • A movement of the ROC beyond the uptrend or downtrend indicates that the rate of change is becoming faster.
  • Traders can determine the prices at which overselling or over-purchasing occurred in the past by observing the ROC and avoiding any moves during that position.

What are the Limitations of the ROC Indicator?

Some traders believe that the recent price is a better indicator than the historical price. It can be considered a limitation of the ROC indicator.

Conclusion

  • To sum up, the ROC indicator provides traders with insights to make financial decisions.
  • However, traders should use the insights in an efficient way to make profits.
  • Even though the ROC indicator is accurate in terms of data, the insights may be incorrectly interpreted sometimes, leading to losses.

 

Related Articles: Guide to Parabolic SAR Indicator Overview Of 3 Bar Reversal Indicator | What is a 5-bar Reversal Indicator | Ultimate Guide to Positional Trading

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