What is ROC on the stock exchange
With this chart tool you can recognize signals earlier
The rate of change indicator (ROC) shows a trader the dynamics of trends, i.e. the strength of price fluctuations.
It gives premature answers to questions such as: Is the market intact? Is there a trend reversal imminent? Where are buy and sell signals? This makes it a supplement to pure trend determination tools such as the Aroon indicator, which shows the change in trend phases and trend direction.
Rate of Change Indicator - Momentum with percentage values
The rate of change conveys the speed at which a course is developing. The price developments are calculated in advance, which means that as a trader you get signals early on, especially in extreme points.
In this function of the cycle analysis, the ROC does not differ from other momentum indicators. The reason why it is still an independent tool in technical analysis is due to the approach to its calculation.
Unlike other momentum indicators, the ROC is not derived from absolute values, but from relative values. Starting from the closing price, it is not subtracted, but divided. And with that he calculates how much the momentum has changed as a percentage.
In the illustration, the oscillator fluctuates around a zero line. The time windows as parameters can be set as desired.
Areas of application and use
The shorter the period setting, the more the early indicator reacts to the smallest price fluctuations. The oscillator swings more violently around the zero line. This shows whether a trend is growing stronger or fading.
If it goes over the zero line, an upward trend accelerates - signal: Buy. If it goes below that, it slows down - signal: sell. The opposite is true for the downtrend. If the zero line is intersected, this indicates a trend reversal.
This is the main application of the ROC. If the indicator is set for longer observation periods, the reaction intensity decreases and it becomes a trend following indicator.
The second area of application is the identification of divergences. The price movement of the indicator is compared with that of the underlying, such as a share. If the momentum rises or falls while the price remains largely unchanged, there is a divergence. The trend is no longer intact. A warning signal: the course behavior is likely to change soon.
The third purpose is to present the market situation. If the momentum suddenly rises sharply, then with rising markets this means: overbought. In falling markets: oversold. This can also indicate a trend reversal.
More advantages than disadvantages
As already mentioned, the ROC reacts hyperintensively with its percentage calculation approach, especially with short period settings. The course looks restless, fluttery. This can be remedied by creating a moving average, with which the moment development is calmer. This is offered in the version of the "Smoothed Rate of Change".
Apart from this weak point, the ROC generates good, leading signals. Of course, experienced traders use it in conjunction with other indicators.
You can also find more information on the subject of exchange rate fluctuations and how you can protect yourself against short drops here.
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