Monday, October 31, 2011

Rate of Change and Momentum

Introduction and Calculation
The Rate of Change (ROC) indicator is a very simple yet effective momentum oscillator that measures the percent change in price from one period to the next. The ROC calculation compares the current price with the price n periods ago.
ROC = ( (Today's close - Close n periods ago) / (Close n periods ago) ) * 100
The plot forms an oscillator that fluctuates above and below the zero line as the Rate of Change moves from positive to negative. The oscillator can be used as any other momentum oscillator by looking for higher lows, lower highs, positive and negative divergences, and crosses above and below zero for signals.


The chart of Lucent shows that a large negative divergence formed in Dec-99 and the ROC moved into negative territory just before the large decline. While this was a superb sell signal, the ROC can produce whipsaws as it moves above and below zero. As with most technical indicators, ROC should be used in conjunction with other aspects or technical analysis as well as other non-momentum based indicators. 

Rate of Change and SharpCharts

ROC can be plotted using different periods such as 12 days or 30 days by changing the value in the first box. The longer the time span used, the greater the fluctuation in the indicator (in terms of both magnitude and duration). The optional second parameter allows the user to add a moving average line to the ROC indicator.
Rate of Change (ROC) vs the "Momentum" Indicator
There is another popular indicator called "Momentum" that is almost identical to the Rate of Change indicator. Where the ROC indicator displays the rate of change as a percentage, the Momentum indicator displays it as a ratio. Because both indicators give identical signals, has choosen to only implement the Rate of Change version.