Chapter 8 – ROC Rate of Change Indicator

This is an excerpt from the soon to be released Liberated Stock Trader book and the accompanying “Academy Pro Training Course”

The rate of change is very similar to the Momentum indicator mentioned in the previous section, with one important difference, instead of a subtracting the latest price from the price X periods before it divides it.  This is an important difference that improves the indicator.

Rate of Change = 100 (C / CX)

The results of ROC are similar but slightly better than that of Momentum as it handles large price swings better.  As in the previous section, follow the numbered steps in the following Chart to understand how ROC can tell the story of future price movement.

ROC-rate-of-change

Freestockcharts.com  chart courtesy of Worden Brothers, Inc.

Now this is a busy chart.

  1. Using a trend line we can see that ROC breaks its downtrend at the end of November 2008.  This is a useful way of using Oscillators, plotting trend lines on them.  As oscillators are leading indicators using a trend line will show us when a trend change happens before it is reflected in price.
  2. The price then follows by moving up 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 to improve our chances of guessing correctly.  However this time it fails.
  4. ROC indicates a positive divergence, yet price hits resistance at 24.30 and then plummets south.
  5. ROC now corrects itself and 2 days before the actual severe price drop ROC shoots downwards, this is a warning sign top exit.
  6. Here again ROC shows a negative divergence.
  7. Price again hits resistance in June at 21.50.  ROC’s divergence was correct and the stock drops.
  8. ROC Surges upwards in August and although price retraces in September ROC powers on showing a positive divergence.
  9. The first 2 weeks in October the price surges again.
  10. ROC shows another negative divergence with 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 also 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.

Other Chapters of the Liberated Stock Trader Book are listed below

Chapter 1 – Essential Stock Market Knowledge – Fundamentals

This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and micro economics

Chapter 2 – What Really Moves Markets - Why do Booms and Busts Occur?

This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles and how to spot them.

Chapter 3 – How do markets move ? - Stock Market Cycles – Business & Economic Cycles – Kondratieff to Kuznets

What are stock market cycles and the cycles of business and economies.  Important information that you need to appreciate as part of your core analysis.

Chapter 4 – Is the Company in great shape – P/E Ratio

Next we move into fundamental analysis and the financial fitness of a company.  All the major indicators and measures are covered.

Chapter 5 – How to find the best stocks

Stock screening means using criteria to short list the kind of stock that you want to purchase.  A vital part of any stock market training

Chapter 6 – Chart Reading made easy - Japanese Candlesticks – Bullish Reversal Patterns

Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy.  The next thing to do is the technical analysis.  Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out.  This is called catching a falling knife.  This is what chart patterns and technical analysis helps with.

Chapter 7 – Trend Lines and Price Patterns - How to draw trend lines

Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend and estimate how long the trend will last.  Vital for you to establish buy and sell signals.

Chapter 8 – Chart Indicators are your friends ! – ROC Rate of Change Indicator

Which indicators should you use, there are literally hundreds of stock chart indicators.  Each have a specific use case and application, which should you use?

Chapter 9 – Chart Indicators Volume - The Price Volume Relationship

Volume is a vital indicator along with price.  Both of these you need to understand in granular detail, you will learn everything you need to know.

Chapter 10 - Advanced Stock Charting Techniques Parabolic SAR

Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.

Chapter 11 - Sentiment Indicators & Trading the News - How to trade the news

How are the market participants feeling?  Positive, Negative or indifferent.  Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator.  Lean how to use them to your advantage.

Chapter 12 - Trading Strategy - What type Of Investor are you?

Understanding how you want to invest, how much time you have and your time horizon.  These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you.  Then we move on to building your stock investing system, a critical element to your plan.

4 COMMENTS

  1. Do you think Number 3 is false signal ? , i feel still it is positive divergence(not a false signal) , but technical indicator has failed( as you said clearely in step 3).. trendlines would have helped here.
    The default of ROC is 12, what you have used here in this chart, do you recommend any custom period with your experience ?

  2. you make a good point. I believe it is a false signal because of one of the inherent weakness of this indicator. This indicator I plotted as a ROC 40, meaning on this daily chart 40 days. This false signal actually occurs 40 days after the low on 11.21.2010. Because the low in November was an extreme swing, 40 days later we see a spike.

    ROC is quite good, but it has been somewhat superseded by indicators with built in smoothing to take out these errors, such as RSI. The best Oscillators I have found are with Telechart, Moneystream, Time Segmented Volume and Balance of Power.

    What settings to use on ROC. It depends what time frames you want to trade in. Shorter term 10, 20, longer term 50. The periods should represent a typical cycle, so we have cycles in the market Weekly, Monthly, Seasonal, Yearly and the business cycle of about 4 years. I cover all this stuff in the book, in detail 🙂

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