Rate of Change Indicator
Rate of Change indicator is a type of pure momentum oscillator, used to measure the percent change in price over a given period of time, and to detect the share price divergence.
Generally, it is used to estimate the strength of the buying and selling (supply and demand) movements of the stock, and to analyse the trend and the possibility of the trend reversal of the share price.
In addition, rate of change can be used as a guide for determining overbought and oversold conditions, and thus using it as a buy or sell signal.
Application:
1. Confirmation of trend
- When both the ROC and the share price are heading north, an uptrend is confirmed;
- When both the ROC and the share price are heading south, a downtrend is confirmed.
2. Buy/Sell signal
- When the ROC indicator is on the higher level, it indicates the market is overbought, it is a selling signal;
- When the ROC indicator is on the lower level, it indicates the market is oversold, it is a buying signal.
3. Divergence signal
When the share price is going up, but the ROC indicator is heading down (divergence exists), indicating the uptrend of the share price is lacking momentum, the market is estimated to peak soon and a correction is possible;
When the share price is dropping, but the ROC indicator is heading up (divergence exists), indicating the downtrend of the share price is lacking momentum, the market is estimated to bottom soon and a rebound is possible.
Conclusion:
Rate of change is used to identify the market trend, and its indicator level (as a guide of overbought or oversold condition) and divergence signal, can be used as reference to buy or sell. As always, it is best to confirm all buy/sell signals with other indicators.
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