The rate of change (ROC) oscillator is a technical tool traders can use to help determine whether a market is overbought or oversold. The indicator works by comparing the current price of an asset to its price at a set point in the past. The outcome is then plotted on a graph which oscillates around the midpoint, which represents zero. To use the ROC to assist trading decisions, it’s customary to display it below a candlestick chart to give a better visual representation of what’s happening in the market.
How is the ROC Calculated?
When adding the rate of change indicator to a chart, the trader can choose how many periods ago the current price is compared to. A standard which many consider the ROC’s default setting is 12. Using this default setting, the formula to calculate the ROC value is the current price minus the price 12 periods ago which is then divided by the price 12 periods ago. The whole outcome is then multiplied by 100 to give the final ROC value. If the current price is lower than the price 12 periods ago, the value will be negative (i.e., below the zero line) and if the current price is higher than the price 12 periods ago, the value will be positive.
The ROC oscillator gives a very good visual representation of the momentum of price movements as a general upward trend will stay around the midline whereas a monster move in a single candle will instantly display as a spike on the graph. A limitation of the rate of change oscillator is that it gives equal importance to the current price and the price 12 days ago. Many investors and traders consider more recent prices to have more weight when determining likely future moves.
How to use the ROC to trade Crypto
The most obvious signal to look for on an oscillator is a large peak or trough as they are visually apparent. These can show periods where a market is overbought or oversold but where the ROC differs to other oscillators such as the MACD is that a large but short-lived move can create a thin spike whereas indicators which use a moving average tend to be much smoother. A point at which the ROC crosses from one side of the zero line to the other can indicate a change of direction for the asset’s value in the form of a reversal. Finding other patterns within the candlestick chart can help to confirm these signals.
The most accurate, low-risk way to use the ROC is to look for signs of divergence occurring between the candlestick chart and the oscillator itself. If the price on the candlestick chart is in an upward trend but the ROC is starting to drop, it could be a signal that the trend is losing momentum and a reversal could be around the corner. Conversely, lower-lows on the candlestick chart coupled with higher-lows on the ROC could indicate a bullish reversal.
The rate of change indicator is one of the simplest oscillators to calculate. Given its simplicity, the ROC is a very useful tool in cryptocurrency trading and is, without doubt, worth learning how to read and understand. A recommendation from the most successful investors and traders in the world is to use a variety of tools in conjunction with one another to add weight to the signals they are displaying.