Price Rate of Change Definition
The Price Rate of Change (ROC) displays the value of the current price relative to the price of n periods ago. The Price Rate of Change can be expressed in either points or percentages.
Price Rate of Change Formulas
To plot the ROC in terms of points use the below formula:
Current Close - Close n periods ago
To plot the ROC in terms of percentages use the below formula:
(Today's Close - Close n periods ago)
-------------------------------------------------- * 100
Close n periods ago
The most common period for the Price Rate of Change is 12-periods for short- term signals, while 25-periods is popular among swing traders.
Trading Signals
Traders will buy a security when the ROC crosses above the 0 line and sell when the indicator crosses below 0. The ROC can be classified as either an oscillator or momentum indicator. As the Price Rate of Change trends higher with price, this is confirmation that the trend has legs. However, if the price of the security heads higher, while the ROC trends lower, this type of divergence often precedes a market top.
Optimizing the ROC
The Percent Rate of Change will have completely different values for different stocks. The best method for trading the ROC is to look at previous peaks and troughs for the indicator. By comparing the current ROC value to recent levels, a trader will know what to expect in terms of price movement relative to the most recent trading activity.
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