Rate of Change (ROC)

The Rate of Change is a momentum oscillator indicator measuring the percent change in price between periods. It uses the previous closing price and compares it with the closing price “n” periods ago. When ROC is negative, the price goes down. When the ROC is positive, the price is going up. The further ROC moves from 0, the greater the momentum of the price change into the respective territory.

ROC can be used for trend identification by combining multiple timeframes. For example, for trading stocks, a popular combination is combining the 250-day (roughly how many trading days there are in a year) and 125-day (trading days per half year) ROC, and if both of them are positive it indicates that the long-term change is up, so the signal is to long, same combination can be used for shorting but with opposite conditions being present.

ROC can also identify extremes and anticipate reversals by identifying when an asset or stock is overbought or oversold. During an upwards trend, for example, you will see minor pullbacks, but the higher highs and lower lows will still be present; you will start to notice how ROC will reach a similar level during each low, essentially pointing out to you the oversold range. In the same way, you can find the overbought range with the opposite condition.

Rate of Change Formula

  1. Money Flow Multiplier = [(Close  -  Low) - (High - Close)] /(High - Low) 

  2. Money Flow Volume = Money Flow Multiplier x Volume for the Period

  3. 20-period CMF = 20-period Sum of Money Flow Volume / 20 period Sum of Volume

Formula Source: StockCharts

For more information (also the source) visit: StockCharts