What are the settings of the ROC indicator? Our swift time has not spared trading in the financial markets: long-term transactions have gone into the vulgar, an increasing number of traders choose intraday trading, or day trading. The need for quick trade decision making places high demands on the set of indicators used for technical analysis and forecasting likely movements in the price of an asset.
Price change rate indicator. Terminology
Rate of change in price (PriceROC) or just the ROC indicator for MT4 is a price-based technical oscillator. Which is displayed in the subwindow of the trading terminal. PROC is often called a purely pulsed oscillator.
As the name implies, the PROC or ROC oscillator shows the rate of price change based on a retrospective analysis for a certain period. The difference can be calculated using points or percentages. The signal line is moved by a typical oscillation signal, making oscillatory movements at the zero line. Levels above zero are bullish, while levels below the zero center line are bearish signals.
The difference between the ROC indicator and momentum is that the latter is absolute.
Like all oscillators, the studied one can be used to determine the time the market entered the trend. It can also be used as an indicator of trend identification, as well as to measure discrepancies in momentum and price.
The first graph below shows the ROC oscillator applied to the daily chart. The setting for this indicator is a 9-period default setting.
The PROC indicator moves relative to a fixed zero line and indicates the acceleration and attenuation of the pulse. The signal can be used to buy from pullbacks in an uptrend or sell in a downtrend.
Calculation of signal line values
It is made according to the formula:
RoC = (S / Sn) x 100%,
- variable S - current closing price,
- and Sn is the closing price of the previous period n.
There are various settings that can be used for the ROC generator. The settings used for this indicator by default are -9 periods. Other commonly used indicator settings include 14 and 25.
Readers should remember that there is no absolute number that can magically give the right settings. Rather, it is important to analyze the signals for each instrument traded and the timeframe used. To use the most appropriate settings for the ROC indicator.
The volatility of the price of the analyzed asset, of course, is of paramount importance. Using too small a number can lead to very erratic readings, while using a higher configuration setting can potentially smooth the ROC to such an extent that signals can be generated with unacceptably high latency.
It is important for day traders to find a balance between 9 and 14 periods of the daily chart.
The settings window for the ROC indicator does not require a description. It is standard for oscillators.
Setting indicator parameters
When using a 5-period tuning, the signal of the ROC oscillator is unstable. These signals make it difficult to identify rising and falling price impulses.
To illustrate the calculation with an example, suppose the price of an asset today is $ 50. The price of the asset 9 days ago was $ 40. Then, based on the ROC for a 9-period look back, the calculation will be ((50 - 40) / 40) * 100 = 25.
How to use the oscillator of the rate of change in technical analysis?
Below are a few ways to use ROC velocity oscillator signals in trading.
The described methods are mainly used for day trading. And also to determine the time of entry into the transaction using the ROC indicator. An analysis method with a rate of change in price is almost the same as with most other commonly used oscillators. Such as MACD, for example.
Use as a sync tool
The ROC indicator can be used as a synchronization tool as part of a trend analysis. Price never moves in a straight line. This means that the price builds a series of highs and lows within the trend.
For a trader, it is optimal to buy near the minimum when the uptrend rolls back or sell near the maximum in a downtrend. The ROC indicator can help traders find these points. Of course, there are several ways to find out the trend.
Trends can be analyzed either by highs and lows, or by the signals of trending technical indicators, such as moving averages.
The first method of using ROC to analyze safe entry into the market uses a simple setup. It includes moving averages and an oscillator.
As a trend indicator
In this example, a moving average is applied to the daily chart. As well as the ROC indicator.
The concept is simple. Buy at the weakest momentum in an uptrend, or sell when momentum begins to weaken. In the area marked by the square, you can see the indicator signal is ahead of the bullish moving average signal.
At this moment, the signal of the indicator is also weak, but it starts to grow. This suggests that the price is likely to rise. Additional confirmation can be obtained from candlestick patterns. Other methods of signal confirmation may be fundamental indicators.
Using ROC to identify divergence
Divergence is a common signal of all oscillators, regardless of what name they are called. The concepts of divergence are the same, regardless of whether the trader prefers to use the ROCK indicator, relative strength index (RSI) or stochastic.
When the oscillator forms a new minimum, but the price does not exist, or when the price forms a maximum, but the oscillator does not, this is a signal of a possible correction.
Price Oscillator Oscillator and Divergence
The price chart above shows some examples of divergence. Here, the price formed a higher high, but the ROC oscillator displayed a lower extremum.
This discrepancy, known as the bear discrepancy, can be used in two ways. Observing this phenomenon, a trader can either enter the market with a short trade, or wait for the price correction to complete, and then enter a long position in the trend.
Other forms of divergence include hidden bearish or bullish divergences, which are more powerful and may signal a continuation of the trend.
Zero line
The zero line crossing signal is another common signal of oscillators. Here, buy or sell signals can be received based on when the ROC moves above or below the zero line. Of course, using this method requires some experience, since not all intersections of the zero line are the same.
Sometimes the ROC can drop below the zero line just to turn back higher. This is important to remember. The indicator responds to the price, and not vice versa. Therefore, traders should focus on price and price action before trading this simple method with the ROC indicator.
A combination with trend indicators can be useful. This will help traders identify a trend based on the intersection of the moving average, and then test it with the ROC.
For trading with the intersection of the zero line of the Price rate of change indicator, you can use a number of other methods, including price action patterns.
Breakthrough Trading with ROC
Impulse oscillators like PROC are very good at trading ranges and breakouts. This is due to the fact that breakouts usually occur with a strong impulse. It is well known that not all breakouts are successful, and it is here that a pulse oscillator such as PROC can help.
For breakout trading, you can use the daily or intraday chart with the corresponding settings for the ROC oscillator. Nevertheless, a balance must be found so that the applied settings do not generate many false signals and do not allow a large delay. The signal line of the indicator should not be too broken or too smooth.
In addition to the studied one, there is also a more perfect version of the oscillator-indicator S ROC, in the calculation of the signal line of which is used not the closing price, but the EMA s values.
As soon as the price has strongly broken through the resistance level, or the upper range, the indicator also crosses the zero line. The trajectory also rises higher and, therefore, this implies continued movement.
The methods described above simply describe many ways to trade using a PROC or ROC oscillator. Of course, there are more methods for using it, besides those described in the article.
Which markets work best with the ROC?
There is no right answer to this. Some may argue that the speed of a random oscillator is ideally used with commodity markets. This may be true, but you can also use it with other assets, including futures or forex. The fact is that ROC is just a mathematical formula.
It does not matter for the indicator what price the goods are calculated by its algorithm, whether it is a stock, marketable oil or its futures, a currency pair or something else. You can use the Price ROC indicator in almost any market. The only requirement is the need to use the correct settings corresponding to the volatility of the traded instrument.
ROC also does not depend on the time frame and just looks at the session. It can be used on the daily and 5-minute chart. Future day traders or even stock day traders can apply the rate of change oscillator to the chart and timeframe of their choice.
In conclusion, it should be noted that the oscillator of the rate of change in price is an indicator of momentum and can be used to determine short-term price falls and rises in a trend.
This simplicity allows traders to easily apply the formula to various markets and timeframes.
It is important to remember that the ROC indicator can grow in both bull and bear markets. This is because momentum rises and falls. Traders should not take ROC as a direction indicator, this is the most common mistake that can be made.