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Technical  Analysis Categories

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Rate of Change ("ROC")

This is one of the simplest and most widely used oscillators; it tracks the velocity of a stock when compared with prior periods. The ROC momentum indicator acts as a warning signal if the direction of a stock trend is changing. By comparing the ROC trendline to the company’s stock price and to moving averages, one can observe if diverging patterns and price movements are formulating. For example, if the ROC trend is rising faster than a company’s moving average, it’s an indication that the stock will continue to rise and is a bullish signal.

The bigger the price changes in a stock, the greater the change in the ROC.

The ROC is calculated by subtracting today’s closing price from the closing price a set number of periods ago, then dividing that difference into the closing price a set number of days earlier. The formula is below:

ROC = [(A-B) / B] X 100

A = Today’s closing price
B= The closing price a set number a days ago

The ROC is expressed as a percentage, and when charted, the percentage fluctuates/oscillates around a 0 to100 vertical reference line. There is also a different version, called a Momentum Indicator, that is the same calculation expressed as a ratio instead of a percentage; when charted, it fluctuates around a zero vertical reference line. The horizontal axis represents the timeline.

Reproduced with permission of Yahoo! Inc. ă 2004 by Yahoo! Inc.
YAHOO! and the YAHOO! logo are trademarks of Yahoo! Inc.
 

Above is a diagram of the ROC Indicator, using Applebee’s as an example. I used Applebee’s because it’s a company that may benefit from the evolving appetite of the baby boomers.

The direction of the ROC oscillator is useful when trying to predict if stock prices will rise or fall.

Click below for more information on oscillators:

Relative Strength Index
MACD
Price Oscillator
Stochastic
Money Flow Index
Williams %R
Volume + Moving Average

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