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
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.
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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
Money Flow Index
Volume + Moving Average