The Rate of Change (ROC) indicator is a momentum-based technical indicator that measures the percentage change in price from one period to the next. It helps traders identify the speed at which a stock or other asset’s price is changing over a specified period. The ROC is used to detect trends, overbought/oversold conditions, and potential price reversals.
Formula:
ROC = [(Current Price – Price N Periods Ago) / Price N Periods Ago] × 100
Where,
Current Price is the price at the most recent period.
Price N Periods Ago is the price N periods ago (N could be any number, like 10, 14, 20 periods, etc.).
N is the number of periods for the look-back (typically 10, 14, or 20 periods).
How To Calculate Rate Of Change (ROC)?
The right side of the chart of the QQQQ’s shows how the Rate of Change is calculated. The closing price on Day #14 was divided by the closing price 14-days ago on Day #1 which netted 1.0467.
One was then subtracted to get .0467 and then it was multiplied by 100 to get 4.67. That means there was a 4.67% increase in the price of the QQQQ’s over the 14-day period highlighted in the chart.
Example of the ROC oscillator as a divergence signal
A regular divergence is a powerful reversal signal that is often seen at the end of a prolonged price trend. More specifically a bullish divergence occurs when the price makes a lower low, while a momentum oscillator, in this case, the ROC indicator, makes a higher high. Similarly a bearish divergence occurs when the price makes a higher high, while a momentum oscillator such as the ROC indicator, makes a lower high.
Notice on the image above, the price action is making a lower low after a prolonged downtrend, while the ROC indicator is making a higher high. As such, this would be considered a bullish ROC divergence signal. The expectation would be for prices to rise, moving in the direction of the rising ROC indicator reading. We can clearly see that following the ROC indicator divergence, prices began to reverse the downtrend and move higher.
