Price Rate-of-Change

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Description

The Price Rate-Of-Change (ROC) indicator (percent method) is calculated by dividing the price change over the last x-periods by the closing price of the security x-periods ago. The result is the percentage that the security's price has changed in the last x-periods.

If the security's price is higher today than x-periods ago, the ROC will be a positive number. If the security's price is lower today than x-periods ago, the ROC will be a negative number.

Interpretation

A long recognized phenomenon of security prices is the fact that prices tend to surge ahead and retract in a cyclical wave-like motion. The Price Rate-Of-Change indicator illustrates this wave-like motion of a security's price in an oscillator format. As the security's price increases, its ROC will rise; conversely, as its price falls, its ROC will fall. The faster prices rise or fall, the faster the ROC will rise or fall.

MetaStock Pro allows you to select the time period used in the ROC calculation. The time period may range from a very short 1-day ROC (which causes an erratic chart) to a long-term 200-day (or longer) ROC The most popular time periods are the 12-day and 25-day ROC for short to intermediate-term trading and a 1-year (255-day) ROC for long-term analysis.

The 12-day ROC is best used as a short to intermediate-term overbought/oversold indicator. The higher the ROC, the more overbought the security; the lower the ROC, the more likely a rally. However, as with all overbought/over­sold indicators, it is best to wait for the market to begin to correct (i.e., turn up or down) before placing your trade. A market that appears overbought may remain overbought for some time. In fact, extremely overbought/oversold readings usually imply a continuation of the current trend.

The 12-day ROC tends to be very cyclical, oscillating back and forth in a fairly regular pattern. Often, price changes can be anticipated by studying the previous cycles of the ROC and relating the previous cycles to the current market.

The optimum overbought / oversold levels (e.g., +/-5) will vary depending on the security being analyzed and overall market conditions. In strong bull markets, it is usually beneficial to use higher levels, perhaps +10 and -5.