About The ROC
The Rate of Change (ROC) is the speed at which a variable changes over a specific period of time. Described as a momentum oscillator, the ROC indicator compares the current price with the previous price from a selected number of periods ago. On a graph, the ROC shows the amount a currency has changed over a designated period of time in reference to a zero line.
How We Use The Rate Of Change
With a reading above the zero line, it indicates that the market price of the currency is greater than the start of the ROC period. On the other hand, a reading below the zero line means the opposite, and shows that the price is trading lower compared to the first ROC period.
The ROC describes mathematically the percentage change in value over a defined period of time, and it represents the momentum of a variable.
The calculation for ROC is:
ROC = (Current Value/Previous Value -1) x100
The current value of a FX Pair is divided by the value from an earlier period and that is then subtracted by 1 and multiplied by 100 to get a percentage representation.
Measuring the rate of change is highly valuable as it allows traders to spot momentum and as well as other trends. This is due to the fact that a pair with high momentum or with a positive ROC usually is bullish in the short term. On the other hand, a pair that has an ROC that falls below its moving average or if it is low or negative, it usually means that the exchange rate will depreciate, and is a sell signal to traders.
The ROC can be a useful indicator for trading divergence. Divergence is when an indicator is trending in one direction and price is going in another direction. Bullish divergence is when price is trending to the downside but the indicator is bullish, and likewise bearish divergence is when price is trading to the upside but the indicator is bearish. Below you can see an example of bullish divergence, and the bullish impulse that happens after this signal.