Rate of change (ROC) stands alone as an important indicator used by many technicians interested in market momentum. It shows the speed at which a variable changes over a specific period of time, and can give traders a sense of how two variables change in relation to each other and at what speed. Here we'll take a look at ROC and how it's used by active traders. (For background reading, see Divergences, Momentum And Rate Of Change.)

ROC 101
The speed at which a variable changes over a specific period of time. Rate of change is often used when speaking about momentum, and it can generally be expressed as a ratio between a change in one variable relative to a corresponding change in another. Graphically, the rate of change is represented by the slope of a line, or horizontal median called the equilibrium. It is this median that tells us everything we need to know about rate of change.

The normal time frame for ROC measurement is 10 days. The ratio to build the ROC indicator is as follows:

Rate of Change = 100 (Y/Yx)

"Y" represents the most recent closing price, and Yx represents the closing price a specific number of days ago. So, if the price of a stock closes higher today than it did 10 days ago, the ROC value point will be above the equilibrium, thus indicating to chartists that prices are rising in that particular issue. Conversely, if the price in today's session closes lower than it did 10 trading days ago, the value point will be below the equilibrium, indicating that prices are falling off. It is safe to say that if the ROC is rising, it gives a short-term bullish signal, and a bearish sign would have the ROC falling. Chartists pay great attention to the time period in the calculation of ROC. Long-term views of the market or a specific sector or stock will use perhaps a 26- to 52-week time period for Yx and a shorter view would use 10 days to around six months.

Example - Exxon Mobil

roc_ntsmall.gif
Figure 1: Exxon Mobil ROC
Source:Tradestation

As you can see in this chart of Exxon Mobil (NYSE:XOM), the events of September 11, 2001, saw the ROC fall off dramatically over the five trading sessions shown on this chart and rallying into the strong market Sept 24, 2001. You can see that the red line turned up sharply that day as the price of XOM jumped over $2. You can see that for the most part, the preceding summer months had Exxon Mobil falling off slightly in price from a level of about $47 in early June to $41 on Sept 10, and the ROC indicator traded below the median line for almost the entire three-month period.

Another important point is the bullish move at the end of the first week in April, when the stock price jumped from $38 to between $44 and $45 by the end of the month.

Example - Nortel Networks

roc_xomsmall.gif
Figure 2: Nortel Networks\' ROC
Source: Tradestation

The second chart is that of Nortel Networks and shows the bearish trend from September 2000 through the next 12 months. There were a number of bullish signals over this same period of time that, for the most part, would have been acted upon by the short-term traders, but it is fairly safe to say that long-term investors would have stayed away from NT during this period of time. The fundamentals of the company coupled with the bearish indicators saw the "smart money" head for the sidelines. As you can see by the chart, there was not a strong bullish sign since the brief tech breakout in April 2001 that lasted just long enough to tease investors into thinking that the bear market for tech issues was over.

Conclusion
New technicians and veterans should look very closely at ROC when looking for plus/minus moves in indexes and stock issues alike, and use a number of different time spans to reconfirm their findings. (For further reading, check out Divergences, Momentum And Rate Of Changeand Simple Moving Averages And Volume Rate-Of-Change.)

Related Articles
  1. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  2. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
  3. Chart Advisor

    Stocks With More Upside Due to Bear Traps (TAP, SPY)

    A bear trap is a pattern that typically leads to at least a short-term rise in prices. Here are stocks exhibiting the pattern.
  4. Stock Analysis

    3 Risks U.S. Equities Face in 2016

    Find out why the probability of a U.S. stock bear market is increasing in 2016 and what the greatest risks are to the bull market that is almost 7 years old.
  5. Active Trading Fundamentals

    New Traders: Trade the Market in 5 Steps

    New traders shouldn’t throw money at securities without knowing why prices move. Follow these five steps to tilt the odds in your favor.
  6. Chart Advisor

    Watch For a Bounce in These Emerging Markets (BRF, PEK)

    While downtrends are clearly in control of the direction of many emerging market ETFs, short-term indicators suggest a bounce higher could be in the cards.
  7. Investing Basics

    Valuation Models: Apple’s Stock Analysis With CAPM

    The capital asset pricing model, or the CAPM, estimates the expected return of an asset based on the systematic risk of the asset’s return.
  8. Stock Analysis

    Will "FANG" Stocks Outperform in 2016?

    Facebook held the most bullish accumulation-distribution pattern into year’s end, telling investors to focus on this issue in 2016.
  9. Chart Advisor

    Stocks At Buy Points In Healthy Uptrends

    These stocks are in healthy long-term uptrends, and a recent pullback presents a buying opportunity.
  10. Chart Advisor

    The Uptrend Is Reversing In Financials

    Active traders are turning to financials because the close below several key long-term support levels suggest that the uptrend is about to reverse,
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  3. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  4. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center