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Key Features and Benefits of VT Trader™

Rate of Change (ROC)

The Rate of Change (ROC) indicator calculates how price has changed within a specified number of time periods by calculating the difference between the current bar's price and the price a selected number of bars ago. The difference is calculated in "Points" or as a "Percentage". The ROC moves in a wave-like fashion (similar to that of price), but it oscillates above and below an equilibrium level set at zero. The ROC rises as prices rise; the ROC declines as prices decline. The greater the change in prices, the greater the change in the ROC indicator.

To calculate the ROC in Points:

ROCPoints = Today's Price - Price n-Periods Ago

To calculate the ROC as a Percentage:

ROCPercentage = ((Today's Price - Price n-Periods Ago) / Price n-Periods Ago) * 100

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Interpretation

The ROC indicator is a simple indicator capable of producing a myriad of buy and sell signals. However, there are four basic methods of interpreting the ROC indicator:

Zero-Level Crossovers: A buy signal occurs when the ROC crosses above zero and a sell signal occurs when the ROC crosses below zero.

 

Overbought/Oversold Levels: To use ROC as an overbought/oversold indicator, generally a few assumptions are made: The higher the ROC readings the more overbought a trading instrument is and the lower the ROC readings the more oversold a trading instrument is. Readings above the overbought level imply an overbought condition (and a pending price correction) while readings below the oversold level imply an oversold condition (and a pending rally). However, it is worth remembering that prices may remain overbought or oversold for extended periods of time. When this happens, it may actually suggest that the trend will continue rather than reverse.

Trend Line Breakouts: Trend lines can be drawn connecting the peaks and troughs of the ROC indicator. Often ROC begins to turn before price thereby making it a leading indicator. ROC readings breaking above a declining trend line warns of a possible bullish reversal while momentum readings breaking below a rising trend line warns of a possible bearish reversal.

Divergence: Looking for divergences between the ROC indicator and price can prove to be very effective in identifying potential reversal points in price movement. Trade long on Classic Bullish Divergence: Lower lows in price and higher lows in the ROC; Trade short on Classic Bearish Divergence: Higher highs in price and lower highs in the ROC.

The materials presented on this website are solely for informational purposes and are not intended as investment or trading advice. Suggested reading materials are created by outside parties and do not necessarily reflect the opinions or representations of Capital Market Services LLC. Please refer to our risk disclosure page for more information.