Rate of Change (ROC)

ROC (Rate of change) is another technical analysis tool which helps in identifying ‘Overbought’ and ‘Oversold’ market situation. With the help of this, buying and selling signals are generated much before the market makes a movement. In calculating ROC, current market price is divided by the price which prevailed a few days ago for share. The value so achieved is known as ‘Rate of change’.

                                  ROC = Current price / Price n days ago

ROC value is plotted on a graph and this moves above or below a central value, that is, one ‘1’. Here ROC value one ‘1’ is the benchmark value. Buying and selling signals are generated as follows:

Buying signals:

• When ROC is more than one ‘1’ (ROC > 1) and moving upward continuously, it indicates that market is likely to move upward.
• When ROC line is less than one (ROC < 1) and moving upward continuously, it indicates that the market  has come out of the red and in the near future it is expected to have the upward movement.
• When ROC is moving downside but the pace of decline has decreased, it indicates that market is likely to reach oversold level and after that it will start rising. An opportunist who can take a risk can buy at this level.

Selling signals:

• When ROC line is increasing but the pace of increase has declined it indicates that that market is about to reach the overbought zone, after which it is likely to decline. One should take precaution or a risk averse investor can sell at this moment.
• When ROC line has made a peak it is identification of ‘overbought’ market, and market is likely to move towards the southwards.
• When ROC is more than one (ROC > 1) but declining, it indicates that market will enter in south zone, i.e. declining zone.

The table given below shows a complete way of calculating ROC for 7 days

                  DAYS    CLOSING PRICE

                      1               135.45

                      2                150.90

                      3                166.10

                      4                170.75

                      5                181.40

                      6                238.70

                      7                249.65

                      8                248.55

7 days ROC on 8th day = (248.55/135.45) = 1.83

Similarly, ROC for other days can be calculated in the continuity and further analysis can be done as discussed earlier.