ROC - Price Rate of Change

Price rate of change (ROC) oscillator measures the velocity of price movement. It is a simple yet effective indicator that gives investors prior warning about impending change in trend.

To plot the ROC, the time period over which the oscillator has to be plotted needs to be determined first. If the period is taken as 12 days, the difference between the latest closing price and the closing price 12 days ago is used for plotting this oscillator.

What ROC indicates
Needless to add that once the latest close is less than the price recorded 12 days ago, the ROC will turn negative. So the ROC fluctuates above and below a zero line that is from the positive to the negative territory. ROC is plotted below the price chart of a stock.
When a stock price is trending up or down, there is a period when the rate of increase or decrease in the stock price slows down and this phase generally precedes a reversal in trend.

ROC captures the slowdown in momentum in this period thus warning the investor about flagging of buying or selling fervour.

The warning is given in the form of positive or negative divergence in the ROC chart. A positive divergence is noticed when the stock price makes lower lows while the ROC plots higher lows. Similarly, a negative divergence is observed when the stock price continues to rise forming higher peaks, while ROC peaks out and begins form lower peaks.

Overbought and oversold
The 12- and 25-day ROC are most widely used. Over a period, each stock or index forms its overbought and oversold regions. But, one should not hurry to initiate a position just because the oscillator has reached the overbought or oversold zone; one must wait until the stock price changes its direction too.
The ROC can remain overbought or oversold for extended periods during which the price continues to trend higher or lower. When ROC is poised above zero, it indicates an increase in upward momentum and ROC below the zero line indicates an increase in selling pressure.



As with most technical indicators, ROC should be used in combination with other tools of technical analysis as well as other non-momentum based indicators.