The Rate Of Change (ROC) is a momentum indicator which measures the strength of a price movement by its rate of change. This indicator measures the percentage change in price from one period to a certain number of periods.
It consists of a single line which gives bullish and bearish signals by oscillating above and below the zero-line. ROC consists of centerline crossovers as well, which gives the oversold and overbought measurements. When the indicator is above the centerline, it means that the market is in bullish momentum, and when it is below the centerline, it tells that the market is currently in bearish momentum.
ROC is also a helpful tool for determining divergence in the market. It remains positive as long as the prices rise, and when the prices are falling, the indicator shows a downward spiral.
Which setting to choose?
The default setting is 9, and traders can use different values according to their style of trading. It’s the trader’s job to understand the market conditions and use the most appropriate settings. In general, the higher the value, the greater is the accuracy of the signals. Likewise, lower the value, lesser is the accuracy of the signals. Also, for lower values, one should expect whipsaws as well.
Installing ROC Indicator to MT4 (Step-by-step procedure)
By default, the ROC indicator is not available in the MT4 Terminal, but it is available on the internet.
Follow the link below to download the indicator.
Download the zip file from the above link, extract the file and traverse to the MT4 directory/MQL4.
Open the ‘indicators’ folder and paste the extracted file in that folder.
Restart your MT4 Terminal.
Now, to access the indicator, follow the below step sequence.
Insert > Indicator > Custom > ROC indicator.
In the below image, we can see that the indicator is applied to the MT4 terminal.
ROC Indicator – Trading Strategy
ROC + RSI Indicator
In this strategy, we have paired the ROC indicator with the RSI to identify the buy/sell signals.
ROC and RSI are both oscillators. RSI is known as Relative Strength Index. This indicator measures the magnitude of price change to find out the overbought and oversold conditions in the market. RSI consists of a line graph that moves between the two extremes areas, having a reading from 0 to 100 levels. This indicator oscillates between traditional levels 70 and 30. The market is considered oversold when it drops below the 30-level and overbought when it moves above the 70-mark.
When the RSI indicator reaches the oversold area and gives a sharp reversal following the ROC indicator which also drops into the oversold area (below the zero-line), it indicates that the market will show bullishness in the coming trading sessions.
Note: This above strategy works perfectly on all timeframes.
As you can see in the image below, when both indicators go into the oversold area following a sharp reversal in the price action, our trade activates.
In this strategy, we suggest you close your trade when the RSI indicator reaches the overbought area and use the recent low for stop-loss.
For the sell side, when the RSI reaches the overbought area (near the 70-level) and gives a sharp reversal, and the ROC indicator too goes above the zero-level (overbought level), and the market shows a strong reversal to the downside as well, we can prepare to go short.
As you can see in the below chart of GBPCAD, the RSI indicator gives a sharp reversal near the 70 levels, the ROC indicator also goes above the zero-line, and the price action gives us a sharp reversal as well. Therefore, as the setup is the same as that of the strategy, one can trigger the sell.
The overbought and oversold areas of both indicators create an imbalance in the supply/demand levels, which is the reason the price rises/drops in the opposite direction.
Tips, pros and cons of the ROC indicator
- Some traders say that the ROC is ideally used on stocks and futures, but one can use it on other markets as well.
- The primary point to remember is that this indicator is a mathematical calculation. Every trader has different expectations from the market. So, to extract the most out of this indicator, traders should focus on tweaking it to the right settings. The lower the value you choose, the more it reacts with the price change and gives false signals.
- Always use this indicator in conjunction with some of the other indicators to have a better confirmation on your trade.
- The ROC is independent of the timeframe. Traders can use it on timeframes such as weekly, daily, hourly or even on 5min.
- The ROC is an excellent indicator to find out the tops and bottoms of the market, as it identifies the overbought and oversold conditions.
- This indicator works best in a trending market. However, it often generates many false signals in a ranging market because of its high volatility.
- Traders can use it for determining divergence in the market as well. But, the problem with divergence is that it sometimes occurs way too early. Also, if the ROC shows a divergence in a strong trending market, then you shouldn’t trust it.
In conclusion, the ROC oscillator is a momentum indicator, which moves above and below the zero-line. The default value is 9, but traders can use it according to their trading style. If you are new to the ROC indicator, then go with the default setting. And, if you are an intraday trader, pair it with some other indicators to maximize your profits. Also, it is recommended to use a lower value to identify accurate buy/sell signals. A sharp upward move on the indicator reflects more demand for the price, and a sharp decline to the downside shows more supply in the market. Hope you understood what ROC indicator is all about. If you have a better trading strategy, let us know in the comments below. Happy Trading.