✔️ Information reviewed and updated in December 2023 by Eduardo López
A financial indicator such as ROC is responsible for providing key information about a company, this means that through a set of data you can obtain important comparisons to make decisions regarding the economic and financial field.
Take as an example a CEO who seeks to know what his growth was during a certain period of time, for this he will need to consider certain financial indicators that can provide more accurate information.
We want to share with you one of the most important indicators the ROC. Do not miss the opportunity and learn more about this technical analysis tool.
What is ROC?
The ROC is an oscillator and by its acronym it is known as the Rate of Change. This indicator is based on price, so it seeks to measure the rate at which the price changes from one period to another. Recall that the measurement of the current price in relation to a defined retrospective period is the correct typical definition of the so-called exchange rate.
This indicator generally helps traders determine not only momentum, but also shows them overbought and oversold conditions., as well as teaching them the direction of the trend. So the ROC is defined as a momentum oscillator.
Any financial asset can advance indefinitely, but its maximum decline will always be zero, however, negative ROC values have a limit and positive ROC values do not.
How is ROC calculated?
The ROC should be calculated in such a way so that traders can assess how the price has changed compared to a look back period. And its formula is the following:
ROC = [(Current close - Close n periods ago) / (Close n periods ago)] X 100
N = The number defined by the user, who represents the number of periods.
Normally on most platforms the default value of n is 14, but 9 and 25 are also common among most traders. And in some cases, long-term traders can select a period as large as 200.
Remember that a smaller number will react to prices more quickly, showing broken or false signals.
How can you use it in trading?
Overbought and oversold conditions
Momentum indicators are ideal for trading markets as they help forecast decisive points accurately. The ROC provides a clear picture by anticipating changes based on previous levels of published indicators.
The ROC is one of the most suitable indicators to qualify the breakouts. When the price consolidates or changes, the ROC is in charge of printing the flat values and when a large increase or sustained fall occurs, it is confirmed that the breakout trend will continue in the future.
Zero line crosses
When a zero line crossing occurs in the ROC it is a clear indication that a new trend is forming.