Rate of Change

The rate of change indicator is a technique applied to observe price movement and detectable divergence of prices. It consists in a comparison of the percentage of a current price with the price of the previous period; this period of time is usually of 14 days.

Figure: Rate of Change Indicator

This technique helps confirm prices and view the divergence between them.

Oscillations that indicate upward trend are composed by a high and a low where the peak in the trend should always be higher than the previous period peak, and the low in the period should be higher than the previous period low. A common situation of a rally is the higher low shown in figure. Oscillations that indicate a down trend, are composed by a low and a high where the low in the trend should be lower than the previous low, and the peak in the current period must be lower than the peak in the previous period, for example the lower high in figure

Formula

Two very common situations are possible: when the prices are in an overbought area, where the trader is advised to sell to make profits because of the huge demand for the asset with a small supply. The other situation is when the prices are in an oversold area; where there is low demand and excessive supply and the best thing to do is to buy cheap because the prices will go up.

Possible Application

This technique could be used to anticipate the movement of the market and make profit out of it. Most of the people guide themselves through common analysis techniques and news making prices move excessively.

Leave a Reply

Your email address will not be published. Required fields are marked *