Rate of change indicator is a kind of momentum oscillator indicator.

Being a momentum oscillator indicator,Rate Of Change indicator was created by Fred G Schutzman with the main objective of helping traders to know whether the market is in an overbought or oversold condition by measuring the change in current price to that of the n period price.

Since Rate of change is an oscillator indicator, it therefore  has an oscillation at point 0.000 just like other oscillator indicators.

Rate of change indicator is therefore based on divergence and overbought and oversold in the market.

According to Fred G Schutzman, Rate of change indicator values are gotten using the following formula;

Rate Of Change =( (current price/price of n periods ago)-1)*100

Therefore, rate of change can enable traders to know the direction of the market using the concept of overbought and oversold as well as divergence as follows;

Concept of overbought and oversold

Since rate of change is an oscillator and has oscillation at point 0.000 and is based on oversold and overbought in the market,it therefore follows that when the ROC curve falls below -1 then that will be an indication that the market is moving downwards thus the traders should be trading downwards.When the ROC curve falls below -3,that will be an indication that the market has become oversold thus the trader should close any sell position and enter a buy position since the market will start moving upwards.On the other hand,if the ROC curve has risen above +1,that will be an indication that the market is moving upwards thus the trader should be trading upwards.If the ROC curve rises above +3,that will be an indication that the market has become an overbought thus the trader should close any buy position and enter a sell position since the market will start moving downwards.The values on ROC have not yet being multiplied by 100.When multiplied by 100,they will give the actual values.This is indicated as from the candle sticks chart below;

From the candle sticks chart above,there are 3 points,point A,B and C. Point A represents the point at which the ROC has risen above +3 while point B represents a point at which the ROC has fallen below -3.On the other hand,point C represents the ROC indicator curve.At point A ,the ROC has risen above +3 thus an indication of an overbought market.This signals the traders to close any buy position at that point and open a sell position since the market is starting a downwards trend.On the other hand,at point B,the ROC has fallen below -3 thus an indication of an oversold market .This signals the trader to close any sell position at that point and open a buy position since the market is starting an upwards trend.

Concept of Divergence

Using the concept of divergence, when the Rate of change indicator is moving downwards while the market is moving upwards, the market will reverse and start moving in the same direction downwards as the Rate of change while when the Rate of change is moving upwards while the market is moving downwards, the market will reverse and start moving upwards in the same direction as the Rate of change. This is indicated as from the candlesticks chart below;

From the candlesticks chart above, there are two points, point A and B. At point A the market was moving upwards while the Rate of change indicator was moving downwards. The market then reverse and start moving in the same direction downwards as the ROC thus signaling the trader to be trading in a downwards direction at point A. On the other hand, at point B, the market was moving downwards while the Rate of change was moving upwards. The market then reverse and start moving upwards in the same direction as ROC thus signaling the trader to be trading in an upward market direction at point B

Recommendation:If you are a day trader just use 1 min,5 min,15 min and 30 min time frame while if you are a swing trader just use 1 hour and above time frame if you want rate of change indicator to work well for you.

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