ROC Trading Strategy: Accelerate
Profits with Rate Of Change
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Article by Casey Stubbs
Learn the ROC trading strategy yet another momentum-based
stock strategy but with a twist. ROC trading puts into practice
two concepts: studying the strength of the trend and possible
momentum shifts. By the end of this stock trading guide, you’ll
learn how to trade with the ROC indicator as a stand-alone
system.
It’s important to be able to react very quickly to the constant
rapid changes in stock prices. However, it’s also advised to have
an objective view of where the stock market is going. This
objective view can come from something that is referred to as
the Rate of Change (ROC).
As you know, the real market environment is quite dynamic, and
you always have to adapt to the ever-changing market
conditions. This is the reason why we use the ROC trading
strategy to provide us with better buy and sell signals as well as
exit points.
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Table of Contents
●What is the ROC Indicator?
●How to Calculate the Rate of Change (ROC)
●How to Trade with ROC Indicator?
●Why ROC Trading?
●ROC Trading Strategy
○Long Term Stock Investing with ROC Trading
○Short-Term ROC Trading
●Final Words – ROC Trading
●Up Next…
○Growth Stocks Trading
○Back To Stock Strategies
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What is the ROC Indicator?
The ROC is a short abbreviation that stands for Rate of Change (ROC)
which is a technical indicator that is part of the momentum-based
indicator family. The ROC oscillator measures the percentage change in
the current price and the price N periods ago.
In other words, the Rate of Change tells us how fast the current price is
moving compared to yesterday versus last week, versus last month, etc.
You can simply view the ROC indicator as a velocity indicator.
The concepts behind the Rate of Change (ROC) primarily measure two
things:
1. When shifts in momentum occur.
2. Trend strength and weakness.
If you combine these two principles, you have the potential to find great
reversal trading opportunities.
The ROC indicator oscillates above and below a zero-level midpoint.
Positive ROC readings typically confirm a bullish trend while negative
ROC readings typically confirm a bearish trend.
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Roc in stock market
One important point to understand is, theoretically, a stock can fall only
100%. In this regard, the lower bound of the ROC is -100.
A $10 stock listed on the New York Stock Exchange (NYSE) can become
$0 at max, it can’t go negative. However, the same $10 stock can go to
$50, or $100, or $1,000.
Theoretically, there is no upper limit for how much a stock’s value can
appreciate.
As a result, there is no upper limit to the ROC.
To sum up everything:
● Lower ROC bound = -100 percent.
● Upper ROC bound = infinity.
We’re going to show you how to calculate the ROC and plot the ROC
indicator on the price chart.
How to Calculate the Rate of Change (ROC)
The ROC indicator formula is revealed below:
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ROC = [(Closing Price – Closing price N periods ago)/ Closing price N
periods ago] x100
Where:
● Closing price = closing price of the last day or the most recent
period.
● Closing price N periods ago = The N value is how many periods
back the current price is compared to.
The default number of periods for which we calculate the ROC is
9-periods. The 9-periods ROC indicator is more suited for short-term
trading. For long-term trading, stock traders need to choose a bigger
period like 50,100 or even 200 periods in the case of really long-term
investors.
The multiplier 100 at the end of the price Rate of Change indicator
formula is used to transform the result in percentage terms.
Now that you know what is the ROC formula, let’s see how to trade with
ROC indicator.
Below, we’re going to reveal what are the most popular ways traders use
the ROC in the stock market.
How to Trade with ROC Indicator?
In short, the ROC indicator moves in tandem with the price. If the stock
price is rising compared to N-periods before then the ROC will be
positive. Conversely, if the stock price is falling compared to N-periods
before then the ROC will be negative.
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Roc stock
Now, on the same TESLA stock chart above, you can notice that when
the stock price is in consolidation mode, the ROC tends to gravitate
towards the midpoint aka the zero levels.
The ROC oscillator falls (rise) in tandem with the stock price. At the
same time, the rate of falling (rising) in the stock will become more
depressed (strong) as the stock price falls (rises) more speedily.
Now, as soon as the rate of fall (rate of change) decreases, the ROC will
bottom out and the negative value of the ROC reduces. As soon as the
stock is at the bottom, the ROC value of the stock will start rising as the
stock value is not falling anymore.
Now as soon as the stock price goes up a little bit, the ROC value should
turn positive depending on how far back (how many periods back) the
ROC calculation goes. As the speed of the ROC increases, the stock
price will also move higher more rapidly.
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And, towards the pick of the stock, the ROC oscillator will again fall as
the rate of price changes will slow down. In a nutshell, this is how you
can interpret the ROC behavior.
Here is a short summary of how to trade with ROC indicator for
beginners:
● A sharp surge in the ROC indicates that the stock prices are
advancing more rapidly.
● A steep decline in the ROC indicates that the stock prices are
declining more rapidly.
● When the ROC hovers above and below the zero line, it indicates
that the price is consolidating.
● Crossover of the ROC zero line can indicate a shift in the current
trend.
Note* Please be aware that the crossover strategy can be a little bit
riskier as the ROC indicator is prone to whipsaws (see chart below).
How to trade with roc indicator
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The ROC indicator can also give us overbought and oversold signals.
However, without a reliable ROC trading strategy, the ROC overbought
and oversold signals are not as accurate as the RSI indicator or the
stochastic indicator signals.
In the following headings, we’re going to show you a proven method to
trade ROC overbought and oversold signals.
Another less common application of the RSI indicator is to trade
divergence signals.
The ROC divergence signals happen when the stock price moves in one
direction but the ROC oscillator moves in the opposite direction.
See the ROKU stock chart below:
Roc trading
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Why ROC Trading?
You might be wondering why you should use the ROC, and not the RSI
oscillator or Williams’s %R indicator or other oscillators. While these
indicators are not mutually exclusive, it is important to understand what
makes each unique.
First, the ROC is a leading oscillator that can be used to spot stocks with
high momentum, which normally in the short term will outperform the
market. In other words, ROC stock selection can help you buy quality
stocks with the hope of achieving a positive return.
Some stock screeners come with the ability to track ROC stocks and set
up alerts for Rate of Change signals.
If you’re interested to learn more on this topic, check out our stock guide
Best Practices to Pick Winning Stocks.
To sum everything up:
If we break down the trend and study the way the trend is moving, we
might notice that the rate of change or the speed at which the trend is
moving is changing. The main idea is to use the ROC indicator to
potentially detect areas where the market is starting to slow down or
speed up
The rate of change is going to potentially tell us how strong buyers and
sellers that dominate the market are.
Let’s see how to trade with the ROC indicator in combination with other
technical indicators.
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If you want to get deeper into how to combine trading indicators like a
pro check our guide here: Best Combination of Technical Indicators.
See below:
ROC Trading Strategy
This ROC trading strategy will help anyone learn how to trade with the
Rate of Change indicator to forecast future stock price momentum
shifts.
We don’t want to discriminate against any particular trading style.
So, in an effort to make everyone happy we’re going to outline two
approaches:
1. ROC trading strategy for short-term traders (scalpers and day
traders).
2. ROC trading for long-term stock investing.
Let’s first give the long-term stock investor some food for thought.
Long Term Stock Investing with ROC Trading
It’s not a secret that momentum-based oscillators are a day trader’s best
friend. However, the ROC indicator makes a great tool for long-term
stock investing.
When you trade on the long-term stock chart, the shift in the market
sentiment will be visible with a delay. So, inevitably you’ll be late for the
party.
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The twist to get around this trap is to analyze the trend in multiple
timeframes.
There are 250 trading days within a year, which can be further broken
down into:
● 125 trading days per half-year.
● 63 trading days per quarter.
● And, 21 trading days per month.
Naturally, a trend reversal would first occur and be visible on the lower
timeframes and slowly roll out to the other timeframes.
Now, here is how to spot an early shift in the market trend.
If the 250-period ROC and the 125-period ROC are both positive, then the
long-term trend is bullish. At the same time, you’ll notice that the
shortest period (ROC-21) will produce many whipsaws due to the natural
ebb and flow of the market.
The rule we’re going to use two-time frames to confirm a shift in the
trend direction.
In this case, we want 21-period ROC and 63-periods ROC to both turn
negative to confirm an early shift to the downside. Once they hold below
the zero levels the 125 and 250 periods ROC should also turn negative to
really confirm a change in the trend.
See the FB stock chart example below:
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Roc stock market
Short-Term ROC Trading
To determine the overall intraday trend, we’re also going to plot the
40-period moving average. When the slope of the moving average is up
we know the general stock trend is up.
See the Tesla stock chart below:
Roc stock uptrend
We can notice that as Tesla’s stock price was moving higher, the ROC
was slightly coming below the zero levels. In an uptrend, you can find
that when the ROC is coming out of the negative territory and moves
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above the zero level, the Tesla price was bottoming, providing us with
great buying opportunities.
The 20-period moving average is there to keep you out of big troubles
and possible big losses.
Here is another application of the 20-periods MA in combination with the
ROC indicator.
When the moving average turns flat, it indicates that the market is in
consolidation mode and inevitably the ROC will gravitate towards the
zero levels (see the chart below).
This means the ROC will cross back and forth at the zero levels resulting
in many false signals.
In this market scenario, it’s best to stay out and better find another stock
that it’s in a clear trend.
Roc stock flat trend
Final Words – ROC Trading
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In summary, ROC trading is all about detecting momentum shifts in the
price of a stock. Like all technical indicators, it’s a good idea to
complement the ROC indicator with other tools. It’s important to keep in
mind that the ROC indicator has its own limitation, and that’s the reason
why the ROC trading strategy presented in this guide combines other
trading methods or technical indicators.
Here is a quick summary of what you’ve learned today:
● ROC is telling us how fast the price is moving compared to
previous periods.
● ROC upper band is unlimited, while the lower band is limited to
-100.
● ROC rises and falls with the price.
● Stock prices are consolidating when the ROC hovers near the zero
level.
● ROC indicator is good for stock selection.
● For long-term investing analyze the trend in multiple timeframes.
Thank you for reading!
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