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The Rate of Change (ROC) indicator evaluates the percentage change of the current price as estimated to the price a certain number of periods ago. The ROC indicator might be used at times to confirm price moves and detect divergences.
As a momentum oscillator, ROC signals include centerline crossovers, divergences and overbought-oversold readings as well.
The ROC calculation differentiates the current price with the price “n” periods ago. The plot forms an oscillator that alternates above and below the zero line as the Rate-of-Change moves from positive to negative.
The ROC is categorized as a momentum or velocity indicator because it evaluates robustness of price momentum by the ROC.
HOW THE RATE OF CHANGE INDICATOR USED
The ROC appears in a distinct window below the price chart. The ROC is organized against a zero line that differentiates positive and negative values. Traders, positive values indicate upward buying pressure or momentum, while negative values below zero indicate selling pressure or downward momentum. Increasing values in either direction would be positive or negative, indicating increasing momentum, and decreasing values indicate waning momentum.
The ROC is also usually used as a divergence indicator that signals a possible upcoming trend change always. Divergence occurs when the price of a stock or another asset moves in one direction while its ROC moves in the opposite direction.
The Rate-of-Change Oscillator assess the speed at which prices are changing. Upward surge in the Rate-of-Change contemplate a sharp price advance. A downward dive indicates a steep price decline. Though the traders can look for bullish and bearish divergences, these formations can be fallacious because of sharp moves. Successive advances are usually less sharp and this causes a bearish divergence to form in the Rate-of-Change oscillator. It is very important to remember that prices are persistently increasing as long as the Rate-of-Change remains positive. Positive readings may be less than before, but a positive Rate-of-Change still reflects a price increase, not a price decline. As all technical indicators, the Rate-of-Change oscillator should be used in concurrence with other features of technical analysis.
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