## Rate of Change (RoC)

### What is it?

Rate of Change (RoC) is similar to the Momentum (MTM) oscillator as it is another simple leading momentum indicator that measures the pace at which a trend is accelerating or decelerating. The RoC does this by comparing the latest price close to a price close of a specified period in the past. Thus, a 7-day RoC compares the latest price close to the price close of seven days ago. Like the MTM indicator, the RoC tends to be erratic as it is very sensitive to price changes of both the latest close and the close of the specified period.

### How is it calculated?

RoC is calculated in two steps. First, momentum is calculated by subtracting the previous price close from the latest price close. Then the result is divided close by the previous price close and multiplied by 100 to give a percentage. The formula is:
RoC = ( Latest close - Previous close ) / ( Previous close ) x 100
where the previous close is an earlier price close specified by the trader. The result is a percentage that is plotted as an oscillator that oscillates between 100% and -100%.

### How is it used?

As with the momentum oscillator, the key consideration when using RoC is the center line. When the price of the underlying security is in an uptrend, a buy signal is generated when the RoC falls below its center line and starts to turn back up. When the price of the underlying security is in a downtrend, a sell signal is generated when the RoC moves above its center line and starts to turn back down.

In ranging markets (non-trending) the overbought and oversold reference lines are a key consideration. However, the reference lines must be drawn manually around the extreme areas of the RoC. As a general rule, the RoC should not spend more than 5% of the time above or below the reference lines. When the underlying security is in a range, a sell signal is generated when the RoC moves out of the overbought area over the upper reference line. Similarly, a buy signal is generated when the RoC moves out of the oversold area from below the lower reference line.

Entry signals are also generated when a trend line drawn on the RoC is violated.

### Chart Example

The following chart shows a 20-period RoC in the lower chart panel on a 30-minute chart of the Dow Jones Industrial Index.

RoC on a 30 Minute DOW chart

## Wealth Warning

Trading equities, options, derivatives, currencies, commodities or any other financial security can offer significant returns BUT can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, a risk analysis, and set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.

Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be construed as a guarantee of future success!

### Momentum Indicators

A Momentum Indicator

Momentum indicators can be used to track the rate at which the price of the underlying security changes rather than the price changes itself. These indicators are usually leading indicators as they tend to be oscillators by nature.

Some momentum indicators, such as the Stochastic Oscillator and the Relative Strength Index (RSI), have an upper boundary (usually 100) and a lower boundary (usually -100) while others, such as the Commodity Channel Index and the MACD, do not have upper and lower boundaries. In the case of the latter, historical high and low levels ...

## Related Indicators:

### Smoothed-RoC (S-RoC)

Smooothed-RoC

The Smoothed-RoC (S-RoC) is a leading momentum indicator that was developed by Fred G Schutzman as a refinement of Rate of Change (RoC). Like the RoC, S-RoC measures the strength of a trend by determining whether the trend is accelerating or decelerating. However, while the RoC compares the latest price close to a previous and is quite erratic, the Smoothed RoC compares the latest value of the EMA to the value of the EMA at an earlier point in time.

Because the S-RoC is based on EMAs, it is far less erratic and far less prone to generating ...