What Is Monetary Policy? | Goals, Tools, and How It Works

ROC (Rate of Change)

1. Overview

ROC (Rate of Change) is a technical indicator that measures the percentage change in price over a set lookback period. It compares the current price with the price from a specified number of periods ago and expresses that change as a percentage. ROC shows whether price is rising or falling—and how fast—so it’s especially useful for spotting acceleration and deceleration in momentum.

Because ROC quantifies how sharp price swings are, it’s very helpful for checking trend strength. Despite its simplicity, it’s effective for judging whether a trend is continuing or a turning point may be forming.

2. How ROC is calculated

ROC is calculated using the formula below:

ROC = (C_t − C_t−n)/C_t−n × 100
ROC = \frac{(C_t - C_{t-n})}{C_{t-n}} \times 100

• C_t: current close
• C_t-n: close n periods ago
• ROC: rate of change (%)

This yields the percentage change between the current price and the price n periods earlier. Common choices for n include 12 or 14, but it’s configurable.

3. How to use ROC

1. Gauge acceleration and deceleration
   A high ROC indicates accelerating advances; a low (or falling) ROC suggests momentum is fading. This helps assess the strength and durability of a move.
2. Identify overbought/oversold conditions
   Extremely high ROC readings can imply overheating and the potential for a pullback, while very low readings may point to oversold conditions.
3. Divergences (price vs. ROC)
   When price and ROC move in opposite directions, a divergence is forming. For example, if price makes a new high but ROC fails to confirm, it can hint at trend weakness and a possible reversal.
4. Zero-line crosses
   Crosses of the zero line can be treated as trend-shift signals: crossing above zero is often read as bullish, below zero as bearish.

4. Pros and cons of ROC

Pros:

• Simple and easy to use: The calculation is straightforward and the output is intuitive—even for beginners.
• Captures acceleration/deceleration: Because it measures percentage change, ROC makes it easy to see whether momentum is speeding up or slowing down.
• Flags potential reversals: Divergences and zero-line crosses can help spot turning points.

Cons:

• Can generate false signals: As a price-derived indicator, ROC can lag in sharp regime shifts. Signals may be late when trends reverse abruptly.
• Less reliable in ranges: In sideways markets, ROC can whipsaw; pairing it with other tools is advisable.

5. Practical examples

• Spotting acceleration in an uptrend:
  If price is rising and ROC rises strongly, it suggests accelerating momentum—traders may anticipate trend continuation.
• Seeing a slowdown in a downtrend:
  If a downtrend persists but ROC climbs toward the zero line, it may indicate weakening downside momentum and a potential reversal.
• Checking for divergences:
  If price prints new highs/lows but ROC fails to confirm, consider the increased risk of a reversal and evaluate trades in the opposite direction.

6. Summary

ROC is a very simple yet powerful way to quantify price velocity. Because it visualizes acceleration and deceleration, it’s effective for gauging trend strength and spotting reversal clues. Zero-line crosses and divergences can help time shifts, but reliability drops in range-bound markets—so combine ROC with other technical tools.

Whether you trade trend-following or reversals, ROC can be a valuable companion. By reading momentum properly, traders can manage risk and execute more efficiently.