Contents
Introduction to the ROC indicator
The ROC stands for the Rate of Change. This is a technical tool that shows the percentage values of price changes. It collects data from a specified number of periods from the past until now. The ROC fluctuates around a line with value 0. When it moves above it, the direction of the price change is upwards. When it falls below 0 line, the direction of the change in the price is downwards.
With the use of the Rate of Change the traders determine when the price falls into oversold and overbought zones, then they observe divergences and crossovers with the centerline.
Key Takeaways🔑
| →The ROC indicator is a technical tool that helps traders identify price trends and potential reversals. |
| →ROC can be used to observe divergences, crossovers, and overbought/oversold zones, providing valuable insights for trading decisions. |
| →Understanding the ROC indicator and using it wisely can improve your trading strategy, but always perform additional analysis and research before making any investment decisions. |
How to add the ROC to the IQ Option chart
Log in to your IQ Option account and set the chart type. There is the “Chart analysis” button on the left side. Once you click on it, a list of indicators will unfold. Start typing the name “roc” in the search box and you will find the indicator you were looking for.
Now, you can choose to change some of the indicator parameters. There is a “Period” field, “Source” where you can choose what price data are taken for calculation (we recommend to leave the default “close” price). Moreover, you may modify the colour and thickness of the Main line and the Base line.
The Rate of Change indicator will appear beneath the chart with the price bars.
Interpretation of the Rate of Change on IQ Option
The Rate of Change fluctuates around the line with value 0 and it can rise or fall endlessly.
Normally, when the ROC moves above 0 line, you can observe the uptrend on the price chart. And when the ROC drops below 0, there is usually a downtrend. Nevertheless, the indicator calculations rely on some specific period, so use it wisely.
The ROC can also oscillate very near the 0 line. On such occasions, you will notice a consolidation in the price. But this is the main information you can get from the ROC so you should keep an eye on the general price trend.
The ROC indicator can be used as a signal of the change in the trend. To catch such a situation you must look for the divergence. It occurs when the ROC and the price are moving in opposite directions. Take a look at the exemplary chart below. The indicator has been rising for a while. At the very same time, the price seems to fall. You can expect the change in the direction of the trend. Be aware however that the divergence may continue for some time. It is not recommended to enter the trade as soon as you spot the divergence.
As I mentioned before, it is also possible to catch the moments when the price falls into oversold or overbought zones. But the thing is that there are no permanent borders that can help you with this task. You will have to identify the limits for yourself. Follow the ROC indicator on a particular asset for a long period and after some time, you will discover what are the extremes for it.
Pros and Cons of the ROC Indicator✅❌
Pros:
- 📈 Simple and easy to understand, making it accessible for traders of all skill levels.
- 🔍 Identifies price trends, potential reversals, and overbought/oversold zones.
- 🔧 Can be customized by selecting different periods to suit individual trading styles and strategies.
Cons:
- 📉 May produce false signals, especially during periods of price consolidation.
- ⏳ Can be sensitive to whipsaws and requires additional confirmation from other technical tools or analysis.
- 🚧 Not foolproof; always perform your own research and analysis before making trading decisions.
| Using ROC for Long-term Trading | Using ROC for Short-term Trading |
|---|---|
| Choose higher values of ROC period (e.g., 200). | Choose lower values of ROC period (e.g., 9). |
| Provides more stable signals, reducing the impact of short-term fluctuations. | Reacts faster to price changes, capturing short-term market movements. |
| Ideal for traders focusing on long-term trends and positions. | Suitable for day traders and those looking for short-term opportunities. |
How is ROC indicator calculated?
The ROC is calculated from the following formula:
(C2 – C1) / C1 * 100
C1 represents the closing price observed n periods ago.
C2 describes the closing price noted in the last period.
You should focus on the period n. How many past periods you want to take into account. The ROC compares the past price to the recent one. With the small period chosen, it will react faster to the price changes. When you set a higher value of n, the indicator will react slower. But it will also give more adequate signals than in the case of a small period.
If you are a long-term trader, you may consider setting the higher values of the ROC period, for example, 200. If you prefer short-lasting positions, you should choose a smaller period, like for example 9.
When you have made a decision what period you would set, search your C2 that is the closing price observed in the last period.
The next step is to check C1 which is the closing price n periods ago.
Now you have all the numbers, so you can do the math and receive the value of the ROC indicator.
The procedure must be repeated when a new period has ended. Of course, you don't need to calculate anything. The IQ Option platform will calculate the indicator's value in real-time so you can see it directly on the chart.
Summary of the use of the ROC indicator on the IQ Option platform
The way the Rate of Change indicator is calculated puts the same weight in the past and the present price. Some analysts believe that the price of the recent period is more significant.
The ROC indicator shows sensitivity to whipsaws. It can be used to confirm the consolidation in the price. This takes place when the indicator oscillates around the value 0. However, it can produce some false signals at this time because the price movements are really small and the ROC is close to 0 all that time.
The ROC divergences should be used as a confirmation of the trade you plan to enter rather than a signal to actually open a trading position. That is because the signal might be produced ahead of time. You can occasionally observe the situation when the divergence is visible on the ROC, but in fact, the price is moving in the earlier direction for a little while more.
You may want to first try using the Rate of Change indicator on a free IQ Option practice account. You get virtual cash there so you can experiment with different approaches.
I encourage you to share your experience with the ROC indicator in the comments section which you will find down below the site.
Best of luck!
ROC Indicator: Frequently Asked Questions💡
- Q: Can the ROC indicator be used alone for trading decisions?
- A: While the ROC can provide valuable insights, it is best used in conjunction with other technical tools and analysis to confirm signals and minimize the risk of false signals.
- Q: How can I minimize the impact of false signals produced by the ROC indicator?
- A: Use additional technical tools, such as moving averages, RSI, or MACD, to confirm signals and supplement your analysis. Also, consider adjusting the ROC period based on your trading style and risk tolerance.
- Q: How can I customize the ROC period to suit my trading style?
- A: Longer periods (e.g., 200) are more suitable for long-term traders, while shorter periods (e.g., 9) are better for short-term traders. Experiment with different settings to find the best fit for your trading strategy.
- Q: Can the ROC indicator be applied to different assets and markets?
- A: Yes, the ROC indicator can be applied to various assets and markets, including stocks, forex, commodities, and indices. However, it is essential to familiarize yourself with the specific characteristics of the asset or market before relying on the ROC indicator for trading decisions.
- Q: How do I interpret divergences between the ROC indicator and price movements?
- A: Divergences between the ROC and price movements may indicate a potential trend reversal. However, it is crucial to exercise caution, as the divergence may continue for some time. Use additional analysis and confirmations before making any trading decisions based on divergences.