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What Is The Rate Of Change?

Views 1392022.06.17

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Key takeaways

  • The rate of change (ROC) is a momentum indicator that measures the percentage change in a security’s price.

  • In general, the ROC shows whether the price is rising or falling, and the movement of the ROC indicates the price trend.

  • ROC signals include centerline crossovers, as well as overbought-oversold and divergence readings. 

Understanding the ROC

The ROC is a momentum oscillator that measures the percentage change between the current closing price and the previous closing price over a certain period of days.

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(Images provided are not current and any securities are shown for illustrative purposes only.)

For example, the closing price of $Apple(AAPL.US)$ was $143.11 on May 23, 2022, and $156.54 on May 05, 2022, then the 12-day ROC is -8.579, calculated as [(143.11-156.54)/156.54]*100. 

This formula can be expressed as:

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How to interpret the ROC

  • Trend Identification

As a momentum-based price indicator, the ROC measures the trend and strength of price changes.

In general, prices are rising as long as the ROC remains positive. Conversely, prices are falling when the ROC is negative.

Furthermore, a rising ROC above zero shows that the speed of the uptrend is accelerating, while a falling ROC above zero indicates that the speed of the uptrend is slowing down.

There is no upward boundary on the ROC but there is a downward limit because the price has a maximum decline of 100%.

The ROC crossing the zero line in either direction may indicate a trend change. However, ROC can easily hover around the zero line. Therefore, this signal mainly alerts the trader that the price may be trending instead of providing a trading signal.

  • Overbought or Oversold Signal

The ROC can be used to identify extreme cases and predict turning points. When the ROC rises to a relatively high level, it indicates that the stock is overbought and is usually seen as a sell signal.

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(Images provided are not current and any securities are shown for illustrative purposes only.)

Conversely, when the ROC falls to a relatively low level, indicating that the stock is oversold, it is often seen as a buy signal.

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(Images provided are not current and any securities are shown for illustrative purposes only.)

  • Divergence Indicator

The ROC is also widely used as a divergence indicator that signals a possible upcoming trend change.

In most cases, the ROC moves in a similar direction to the stock price. 

However, if the ROC curve is trending downward, but the stock price has a new peak, a divergence occurs, indicating that the stock price may not be able to maintain an upward trend in the future. This situation is shown in the chart below of Tesla's stock price.

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(Images provided are not current and any securities are shown for illustrative purposes only.)

Nevertheless, ROC divergences sometimes give false signals. When the ROC starts to diverge, the price can still run in the trending direction for some time, so a trader should also look at other indicators and analysis methods to further confirm a trend change.

The content in this article is intended for general circulation and informational purposes only. It does not take into account the investment objectives, financial situation or needs of any particular person and should not be relied on as advice or recommendation. Information provided in this article are not specifically intended for or specially targeted at the public in any specific jurisdiction. Neither Moomoo Inc. nor its affiliates are licensed Financial Advisers and do not provide financial advice. You are advised to consult your financial adviser before making any commitment to invest in any capital markets product. The information published is not and does not constitute or form part of any offer, invitation or solicitation to subscribe or to enter into any transaction in capital markets products. Moomoo is a professional trading app offered by Moomoo Inc. In the U.S., investment products and services on Moomoo are offered by Futu Inc., Member FINRA/SIPC. In Singapore investment products and services are offered through Futu Singapore Pte. Ltd., regulated by the Monetary Authority of Singapore (MAS). This advertisement has not been reviewed by the MAS. Moomoo Inc., Futu Inc. and Futu Singapore Pte. Ltd are affiliated companies. Any illustrations, scenarios, or specific securities referenced herein are strictly for illustrative purposes. Past investment performance does not guarantee future results. Investing involves risk and the potential to lose principal.

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