The Rate of Change (ROC) is a pure momentum oscillator that measures the percentage change in price from one period to a specified number of periods ago. Simple yet powerful, ROC helps traders identify overbought and oversold conditions, spot divergences, and confirm trend strength.
What is Rate of Change?
ROC oscillates above and below a zero line, expressing the percentage price change over a specified period. Positive values indicate upward momentum, while negative values indicate downward momentum. The further from zero, the stronger the momentum.
Key concept: ROC is unbounded - it can theoretically reach any positive or negative value. This makes it useful for comparing momentum across different time periods and instruments.
ROC Calculation
The Rate of Change formula is straightforward:
Standard ROC Formula
- ROC = [(Current Close - Close N periods ago) / Close N periods ago] x 100
Calculation Example
Stock XYZ prices:
Current close: $55
Close 12 days ago: $50
ROC(12) = [($55 - $50) / $50] x 100 = 10%
This means price has increased 10% over the last 12 trading days.
Interpreting ROC Values
ROC Above Zero
- Price is higher than N periods ago
- Upward momentum is present
- The higher above zero, the stronger the momentum
ROC Below Zero
- Price is lower than N periods ago
- Downward momentum is present
- The further below zero, the stronger the selling momentum
ROC at Zero Line
- Price is unchanged from N periods ago
- Crossovers of zero line signal momentum shifts
ROC Trading Strategies
1. Zero Line Crossover
The most basic ROC strategy:
- Buy signal: ROC crosses above zero
- Sell signal: ROC crosses below zero
- Combine with trend filters to reduce whipsaws
Zero Line Trade Example
Stock ABC has been in a downtrend. ROC(14) is at -8%.
Price begins to stabilize and ROC rises toward zero.
ROC crosses above zero, confirming the momentum shift.
Enter long with stop below the recent swing low.
Exit when ROC crosses back below zero or shows divergence.
2. Overbought/Oversold Strategy
Identify extreme momentum readings:
- Determine historical extreme ROC levels for the instrument
- Look for mean reversion when ROC reaches extremes
- Combine with candlestick patterns for entry confirmation
3. Divergence Trading
Powerful signals when price and ROC disagree:
Bullish Divergence
- Price makes a lower low
- ROC makes a higher low
- Indicates weakening selling momentum
- Potential bullish reversal ahead
Bearish Divergence
- Price makes a higher high
- ROC makes a lower high
- Indicates weakening buying momentum
- Potential bearish reversal ahead
4. Trend Strength Confirmation
Use ROC to gauge trend quality:
- Rising price + rising ROC = strong uptrend
- Falling price + falling ROC = strong downtrend
- Flattening ROC during trend = momentum loss, potential reversal
ROC as a Relative Strength Measure
Compare ROC across different securities:
- Higher ROC indicates stronger relative performance
- Use to rank stocks for momentum screening
- Helps identify market leaders and laggards
Relative Strength Example
Three stocks in the technology sector:
Stock A: ROC(20) = +15%
Stock B: ROC(20) = +8%
Stock C: ROC(20) = +3%
Stock A shows the strongest momentum and relative strength.
For momentum strategies, focus on Stock A for long positions.
ROC Period Settings
Short-term (5-10 periods)
- More sensitive, faster signals
- Better for short-term trading
- More noise and false signals
Medium-term (12-14 periods)
- Balanced sensitivity
- Good for swing trading
- Most commonly used setting
Long-term (20-25 periods)
- Smoother, fewer signals
- Better for position trading
- Identifies major momentum shifts
Combining ROC with Other Indicators
ROC + Moving Averages
- Only take ROC buy signals when price above 50 MA
- Only take ROC sell signals when price below 50 MA
- Apply moving average to ROC for smoother signals
ROC + RSI
- ROC above zero + RSI not overbought = strong buy
- ROC below zero + RSI not oversold = strong sell
- Divergences in both = higher probability reversal
ROC + Support/Resistance
- ROC turning positive at support = bounce likely
- ROC turning negative at resistance = rejection likely
ROC vs Other Momentum Indicators
ROC vs RSI
- ROC: Unbounded, shows actual percentage change
- RSI: Bounded 0-100, shows relative strength
- ROC better for comparing instruments, RSI better for overbought/oversold
ROC vs Momentum Indicator
- ROC: Expresses change as a percentage
- Momentum: Expresses change in price points
- ROC is normalized and easier to compare across instruments
Common ROC Mistakes
- Using fixed overbought/oversold levels (they vary by instrument)
- Ignoring the overall trend direction
- Trading every zero line crossover without confirmation
- Not adjusting the period for your trading timeframe
Track Your Momentum Trades
Pro Trader Dashboard helps you analyze which ROC setups and signals work best for your trading.
Summary
The Rate of Change indicator provides a clear, percentage-based view of price momentum. Its unbounded nature makes it excellent for comparing momentum across different securities and time periods. Use ROC for zero line crossover trades, identifying divergences, confirming trend strength, and momentum-based stock screening. Combine with trend filters and other technical tools for the most reliable signals.
Learn more: Momentum Indicator and RSI indicator.