# 103-16 ROC Indicator: How to use Rate of Change in Stock Trading

The Rate of Change (ROC) indicator is a technical momentum oscillator that measures the percentage change in price between two points in time. The ROC indicator can identify overbought and oversold conditions and trend reversals.

This lesson will cover calculating and using the ROC indicator in your trading and some ROC indicator strategies.

## What is ROC in stocks?

The rate of change (ROC) indicator is a technical analysis tool that measures the speed and magnitude of stock price changes. The ROC indicator can identify market trends and potential overbought and oversold conditions.

## How is ROC calculated?

The ROC indicator is calculated by taking the difference between the current stock price and the stock price n periods ago and dividing that number by the stock price n periods ago. The resulting number is then plotted on a graph, with the y-axis representing the rate of change and the x-axis representing time.

## What is the ROC indicator formula?

The ROC indicator formula is:

(Closing price today – Closing price n days ago) / Closing price n days ago

## How to use the ROC indicator

There are a few different ways to interpret the ROC indicator. One popular method is to compare the indicator to a moving average. If the ROC indicator is above the moving average, it suggests that the stock price is increasing. If the ROC indicator is below the moving average, it suggests that the stock price is falling at an increasing rate.

Another popular way to use the ROC indicator is to look for divergences. A bullish divergence occurs when the indicator makes new highs while the stock price makes lower highs. This often happens before a trend reversal and can be used as a buy signal. A bearish divergence occurs when the indicator makes new lows while the stock price makes higher lows. This often happens before a trend reversal and can be used as a sell signal.

The ROC indicator can also be used to generate buy and sell signals. A buy signal is generated when the indicator moves above zero, while a sell signal is generated when the indicator moves below zero.

## How to trade with ROC indicator

There are a few different ways that traders can use the ROC indicator.

One way is to look for overbought and oversold conditions. An asset is considered overbought when the ROC indicator is above 70%. An asset is considered oversold when the ROC indicator is below 30%.

Another way to use the ROC indicator is to look for trend reversals. A bullish reversal is signaled when the ROC indicator moves from below 50% to above 50%. A bearish reversal is signaled when the ROC indicator moves from above 50% to below 50%.

## What are roc indicator strategies?

There are a few different ROC indicator strategies that traders can use.

One strategy is to buy when the ROC indicator moves from below 30% to above 30%. Another strategy is to sell when the ROC indicator moves from above 70% to below 70%.

A more aggressive strategy would be to buy when the ROC indicator moves from below 50% to above 50%. This signals a bullish reversal. A more conservative strategy would be to wait for the ROC indicator to move from above 30% to below 30%, signaling a bearish reversal.

These are just a few ways traders can use the ROC indicator. There is no one right way to use this tool. It all depends on the trader’s style and preferences.

## Is ROC a good indicator?

The ROC indicator is a good momentum oscillator that can identify overbought and oversold conditions, trend reversals, and buy and sell signals. While it can provide false signals, it can be a useful tool for traders who know how to use it correctly.

We Backtested ROC Ove 20 Years, Here is The Result.

Rate of Change (ROC) Explained: Best Settings for 66% Success Tested

## Example: Using ROC for trading

In this example, we analyze the post-2008 global financial crisis recovery. This example shows how to use ROC as a leading indicator using divergences.

This is an excerpt from the Liberated Stock Trader Pro Investor Training.

### 12 Important analysis points on the ROC chart

1. Using a trend line, we can see ROC broke its downtrend at the end of November 2008. This is a useful way of using oscillators and plotting trend lines on them. As Oscillators are leading indicators using a trend line, they will show us when a trend change happens before it is reflected in the price.
2. The price then follows from 18.90 to 24.30, a 23% gain.
3. Here, we see a false signal; this shows us that no indicator is perfect. Always remember the price move is the most important; oscillators can help us improve our chances of guessing correctly. However, this time it fails.
4. ROC indicates a positive divergence, yet the price hits resistance at 24.30 and then plummets south.
5. ROC now corrects itself, and two days before the severe price drop, ROC shoots downwards; this is a warning sign to exit.
6. Here again, ROC shows negative divergence.
7. Price again hits resistance in June at 21.50. ROC’s divergence was correct, and the stock dropped.
8. ROC Surges upwards in August, and although the price retraces in September, ROC shows a positive divergence.
9. In the first two weeks of October, the price surges again.
10. ROC shows another negative divergence from the price trend.
11. No new price high
12. Price falls, again predicted by ROC.

You are now familiar with positive and negative divergences but realize that price is the most important indicator and that Oscillators can be wrong. Wait for the indicator to scream; if it says nothing, move on.

## ROC vs. RSI vs. Momentum indicator

The ROC indicator is often compared to the RSI (relative strength index) and the momentum indicator. These three indicators are momentum oscillators that identify overbought and oversold conditions, trend reversals, and buy and sell signals.

The ROC indicator is very similar to the RSI. Both indicators measure the rate of change in the stock price, but the ROC indicator is based on percentage change, while the RSI is based on absolute price change. The main difference between these two indicators is that the ROC indicator is more sensitive to recent price changes, while the RSI gives equal weight to all price changes over a given period.

The momentum indicator is also similar to the ROC indicator. Both indicators measure the rate of change in the stock price, but the momentum indicator is based on absolute price change, while the ROC indicator is based on percentage change. The main difference between these two indicators is that the momentum indicator can identify overbought and oversold conditions, while the ROC indicator is more commonly used to generate buy and sell signals.

## ROC indicator summary

There are many ways to use the ROC indicator, which can be helpful for both short-term and long-term traders. However, the ROC indicator should not be used in isolation like all technical indicators. Combining it with other technical indicators and fundamental analysis is important before trading decisions.

In this section, you were introduced to stock chart indicators. Indicators are all based on a handful of numbers. Price indicators focus on the period’s open, high, low, and close. Price volume indicators combine the stock price numbers with the volume numbers. We looked at moving averages, moving average convergence divergence (MACD), Stochastics, RSI, and rate of change.

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