Hi. There are various technical indicators used to predict
price movements and develop trading strategies in financial markets. One of
these indicators is the Rate of Change (ROC) indicator. In this article, you
will learn how to calculate the Rate of Change (ROC) indicator and how to use
it in forex trading.
What is the Rate of Change (ROC) indicator?
The Rate of Change (ROC) is a momentum indicator that
measures how much the price of an asset has changed over a specific period. ROC
indicates whether price changes are large or small. Larger ROC values represent
larger price movements, while smaller ROC values indicate more stable and
smaller price changes. The most important component of this indicator is the 0
(zero) line. The area above the 0 (zero) line is known as the positive zone,
while the area below the 0 (zero) line is the negative zone. ROC measures the
speed of price changes and helps us identify an existing trend in an asset. A
positive ROC value indicates an uptrend, while a negative ROC value indicates a
downtrend. In other words, ROC is often used to determine both the strength and
direction of a trend. If ROC is above the zero line, it means the price is
rising. If ROC is below the zero line, it means the price is falling.
Rate of Change (ROC) indicator calculation
The ROC (Rate of Change) indicator is used to measure the
rate of change in the price of an asset over a specific period and is typically
expressed as a percentage. In other words, ROC is calculated by dividing the
current price by the price from a certain number of periods ago and then
expressing the result as a percentage. The result represents the percentage
change in price over the last few periods. The ROC indicator is calculated
using the following formula:
ROC = [(Current Price - Price X periods ago) / Price X
periods ago] • 100
Here:
- ROC: The value of the Rate of Change indicator
- Current Price: The current price of the asset
- Price X periods ago: The price of the asset X periods ago
This calculation is done automatically, and when trading, we
pay attention to the value of this indicator. We use it to assess market trends
and momentum.
Trading with the Rate of Change (ROC) indicator
ROC indicator is commonly used to identify buy and sell
signals, and there are several main methods for doing so. I've listed them
below with live chart examples:
Zero Line Crossover. When ROC crosses below the zero line
from above, it can be interpreted as a sell signal. Conversely, when it crosses
above the zero line from below, it can be interpreted as a buy signal. Example:
Look at the 4-hour chart of the Australian Dollar/Singapore Dollar:
 |
| Trading Signals with ROC in AUD/SGD chart |
Overbought and Oversold Conditions. We can trade by
identifying overbought and oversold conditions using the ROC indicator. When
ROC is in an overbought condition, we may consider selling, and in oversold
conditions, we may consider buying orders. Example: Take a look at the 1-hour
chart of the US Dollar/Japanese Yen:
 |
| ROC indicator for USD/JPY overbought and oversold |
Divergences. Divergences are identified between the ROC and
the price chart. For example, if prices are making new highs while ROC is
decreasing (negative divergence), this is considered a sell signal. Conversely,
if prices are making new lows while ROC is increasing (positive divergence),
this is considered a buy signal. Example: Take a look at the daily chart of
Amazon stock:
 |
| ROC Divergences for Trading Amazon Stock example |
Horizontal Markets. The ROC indicator may not be very
effective during market consolidation. During such times, we often see many
zero line crossovers, but prices do not show a sustained movement in any
direction. An example of this can be seen in the 4-hour chart of Bitcoin/USD:
 |
| ROC during Market Consolidation on BTC/USD Chart |
Remember that the Forex market is risky, and you should carefully consider all trading decisions. The ROC indicator is a powerful tool that can be used in forex trading. However, using any technical indicator alone may not help reduce risk. Using it in conjunction with other analysis tools can help reduce risk even further.