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Price
Rate-Of-Change
Description
The
Price Rate-Of-Change (R.O.C.) 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 R.O.C. will be a positive
number. If
the security's price is lower today than x-periods
ago, the R.O.C. 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
R.O.C. will rise; conversely, as its price falls,
its R.O.C. will fall.
The faster prices rise or fall, the faster
the R.O.C. will rise or fall.
MetaStock
Pro allows you to select the time period
used in the R.O.C. calculation.
The time period may range from a very short
1-day R.O.C. (which causes an erratic chart) to a
long-term 200-day (or longer) R.O.C.
The most popular time periods are the
12-day and 25-day R.O.C. for short to
intermediate-term trading and a 1-year (255-day)
R.O.C. for long-term analysis.
The
12-day R.O.C. is best used as a short to
intermediate-term overbought/oversold indicator.
The higher the R.O.C., the more overbought
the security; the lower the R.O.C., 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 R.O.C. 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 R.O.C. 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. |
