Rate of change (ROC)

The rate of change (ROC) is a momentum= indicator showing price acceleration. Mathematically, it is today's close minus the close from x periods (days) ago divided by the close from x periods ago and multiplied by 100. It is considered an oscillator because it is normalized (expressed as a percentage).

It is equal to zero when the price remains the same, is positive when the price is in an uptrend and negative when the price is in a downtrend.

When the price increases by larger amounts (comparing today's close to the close from x periods ago), the ROC is positive and is itself in an uptrend. When the price of the underlying security increases by the same amount, the ROC is positive and horizontal. When the price increases by smaller amounts, the ROC is positive and in a downtrend. It is important to realize that the price of the stock can be an uptrend while the ROC is itself in a downtrend (divergence). The ROC crossing the zero line going down indicates the end of the stock price uptrend and is a signal to sell.

Similarly, when the price decreases by larger amounts, the ROC is negative and in a downtrend. When the price decreases by the same amount, the ROC is negative and constant. When the price decreases by smaller amounts, the ROC is negative and in an uptrend. The crossing of the zero line by the ROC going upward indicates the end of a downtrend; it is a signal to buy.