The Price Rate of Change (PROC) or Rate of Change (ROC) indicator is a price based technical oscillator. It is a pure momentum oscillator that measures the percent change in price from one period to the next. The Rate of Change or ROC indicator mainly reflects the overbought and oversold situation.
Interpretation of Rate of Change (ROC)
Rate of Change is purely a momentum indicator. It measures the increase or decrease percentage in price over a given period of time. Simply, the price rises as long as the Rate of Change remains positive. There is absolutely no upward boundary on the Rate of Change. Traders also can use the trend identification indicator for market entry/exit points.
What are the Key Features of the ROC Indicator?
- The Price Rate of Change (PROC) oscillator is mainly unbounded above zero. The reason is its value is based on price changes that can indefinitely expand over time.
- ROC or PROC indicator expands into positive territory as an advance accelerates. On the other side, it dives deeper into negative territory as a decline accelerates.
- Here, securities can only decline at 100%, which would be to zero. However, even with these lopsided boundaries, Rate-of-Change generates identifiable extremes that signal overbought and oversold conditions.
How to Calculate the Price Rate of Change Indicator?
The main important step in calculating the ROC is picking the “n” value. Here, the short-term traders can choose a small n value, such as nine. On the other side, Longer-term investors can choose a value such as 200. The n value means like how many periods ago the current price is being compared to. Smaller values would see the ROC react more quickly to price changes, but this can also mean more false signals. A larger value means the ROC will react slower while the signals could be more meaningful when they occur.
- First of all, select an n value. It can be anything such as 12, 25, or 200. As I’ve mentioned that Short-term trader traders typically use a smaller number while longer-term investors use a larger number.
- Then you need to find the most recent period’s closing price.
- After that, find the period’s close price from n periods ago.
- Just Plug the prices from steps two and three into the ROC formula.
- Lastly, as each period ends, calculate the new ROC value.
How to Set Price Rate of Change Indicator on Technical Platforms?
Set Price Rate of Change with Zerodha Kite
Traders can find the Price Rate-of-Change (ROC) indicator also under the STUDIES section in the Zerodha Kite browser app. This technical indicator is also available in the Kite mobile App. The Period of Rate-of-Change (ROC) is 14 and we can also set the FIELD. The default FIELD is close and we can set the field open, high, low or close. You can attach the ROC indicator on to any charts likes daily, weekly, monthly or intraday. Please check the image below to understand how we attached the Rate-of-Change (ROC) indicator in the HDFC Bank share price chart.
Set Price Rate of Change with Upstox Pro
Upstox Pro is quite a well-known name like Zerodha kite. Here also, first login account, then open chart. After that, open indicator section, write down the name of the indicator and click on the Apply button.
Top Profit Making Strategies of the ROC Indicator
- A rising ROC simply confirms an uptrend. But sometimes this can be misleading because the indicator is only comparing the current price to the price N days ago.
- A falling ROC means the current price is below the price N days ago. It usually helps confirm a downtrend but isn’t always come out accurate.
- A ROC reading above zero basically reflects a bullish bias.
- A ROC reading below zero reflects a bearish bias.
The zero-line signal is another common method here. Here, buy or sell signals may be taken based on once the ROC moves above or below the zero-line. Of course, using this process requires some experience as not all zero-line crossings are the same.
Like other momentum indicators, ROC also helps to identify the divergence patterns. Like the chart below, the price makes a lower low while the oscillator makes a higher high. It is a bullish divergence.
Now, come to the advanced setup. Here, I’ve added 2 MA (50, Red & 100, yellow). We can take the crossovers to avoid the false noise in ROC.
Working Principle of the Indicator :
- This indicator has an upward surge in the Rate-of-Change reflects a sharp price advance and a downward plunge indicates a steep price decline.
- When the Rate-of-Change remains positive then prices are rising and when the Rate-of-Change is negative then prices are falling.
- Rate-of-Change (ROC) is such an indicator, where, an advance accelerates expands into positive territory and a decline accelerates deeper into negative territory.
The indicator measures the speed at which prices are changing. The chartists can watch for bullish and bearish divergences. However, these formations can be sometimes misleading because of sharp moves in the ROC indicator. The Rate-of-Change oscillator is essential to remember that prices are constantly increasing as long as the Rate-of-Change remains positive, which it may be less than before, but a positive Rate-of-Change still reflects a price increase, not a price decline. Like most other technical indicators, the Rate-of-Change oscillator too should be used in conjunction with other aspects of technical analysis.