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In the era of online trading, traders mustn't rely solely on themselves to do all the analytical work. Digital trading has enabled us to get access to trading records and other relevant market data with great ease. Several analytical techniques can be used on these datasets to help us get insights. One such tool is the ROC indicator. Let’s discuss what ROC is and how it is used.
The stock market is a dynamic space, and the prices of shares constantly keep changing. At any given point in time, a trader would want to know the rate at which the price is changing. This can be understood by a metric called the Rate of Change Indicator. It compares the price change in a recent period with a previous period and arrives at a rate. This is often used to determine the strength and direction of price movements in the market.
The ROC Indicator is a momentum oscillator and it oscillates above and below a zero line. It reflects the rate of price change. Prices are rising when the ROC is above zero, or positive, and the prices are falling when the ROC is below zero, or negative. When the ROC is more distant from the zero line, the rising/falling momentum is understood to be stronger.
The ROC can be calculated for any period, but the most commonly used durations are 12 and 25 days. While you can calculate ROC for any timeframe, the 12 and 25-day periods are the most popular choices.
ROC can be calculated by dividing the difference between the current price of the stock and the base price of the stock by the base price of the stock. Here, the base price would be the price of the stock on base day, which could be 12 days back or 25 days back. As with any rate, this result is then multiplied by 100 to get a percentage value.
Here’s a detailed step-by-step guide to calculating ROC.
To understand how this works, let’s take an example.
Base period - 12 days
Current price - 120 INR
Base price - 100 INR
ROC would be 20 (120-100=20) divided by 100, which would be 0.2 or 20 percent.
If you would interchange the current and base prices the trend would reverse and you would arrive at an ROC of minus 0.2 or minus 20 percent.
ROC is instrumental in trading technical analysis and is one of the important swing trading indicators.
The ROC indicator can be a powerful tool. It helps us measure the percentage change in price over a period, which in turn aids in identifying momentum, generating buy/sell signals, spotting divergences, and noticing overselling/overbuying trends.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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