ASX Charting Course
Chapter 26
Rate of Change
As the name implies, this indicator is measuring the rate at which price is changing.
Rate of Change = ((Price c / Price c-n) * 100) – 100
- Price c is current price
- Price c-n is the price n number of periods prior
- n is a period specified by the user
Rate of change is expressed as a percentage and can be either negative or positive. If the current value is below the previous value selected the indicator will be negative and if the current value is above the previous value then the indicator will be positive. It is an unbounded indicator and accurately reflects the slope of the price curve.
It is similar to the momentum indicator in that it directly measures market movement. The advantage of the percentage change calculation is that it is not sensitive to different absolute price levels. We are in fact measuring the percentage change, not the absolute change.
The indicator is an oscillating indicator and can therefore be used as an overbought and oversold type indicator as it peaks. Traders must exercise caution however as a trending market will result in the indicator remaining in an overbought or oversold state for an inordinate amount of time, depending on the direction of the trend. It is therefore suggested that this indicator be used in conjunction with another indicator that will determine if and when the market is actually trending or trading sideways.
There are a few ways that traders use this indicator. One is as an overbought/oversold indicator. Another is to use it simple as an indication of change of direction. Yet another is to use the movement through the zero line as a trigger to buy and sell. That is to buy when the indicator moves from below the zero line to above the zero line and sell when the indicator moves from positive to negative.
Fig 35 © Copyright 2003 CQG, Inc. All rights reserved worldwide
In the example above, the market has clearly been trending higher and the indicator has spent most of its time above the zero line. The peak just above the horizontal line at 1 has been registered as reflecting an overbought condition of the market.
Craig MacLean is a Futures Adviser Licensed under the Australian Securities Commission, Corporations Law. The writer accepts no responsibility for any losses incurred from any action or inaction derived from the advice in this report.