the hAnDbook of technIcAl AnAlySISany of them. Each oscillator has its individual characteristics and it takes time to
familiarize oneself with them. Nevertheless, the trader should understand that
oscillators only generate trade signals, not trade triggers.
rOC (tracking Momentum via the ratio Method)
The rate of change oscillator (ROC) tracks the percent or ratio change in price
over N periods. Note that some practitioners also use a smoothed version of the
ROC for better visualization of price behavior, especially if there is significant vol-
atility. Although the ROC usually uses closing prices, some practitioners also use
typical price, midprice, and weighted close prices. The general ROC formula is:
ROC=(Latest Price Price− Nperiods back Price) / Nperiods backIf we multiply the ROC value above by 100 percent, we get the percentage
representation of ratio change. As such, a $10 change from $1 and $90 will be
displayed differently, for example:
($ $ )/$−×=% %11 1 1 100 1000
($ −$ )/$ ×=% %110 100 100 100 10
A $10 rise over 10 periods starting from $1 has a larger ROC value when com-
pared to a $10 rise over 10 periods starting from $90. As such, assuming that prices
rise $10 per every 10 periods, we would see the ROC flatten out as prices rise. This
may induce the practitioner to believe that the uptrend is starting to weaken. When
prices are flat or beginning to flat line, the ROC will decline to zero. For the ROC
to remain flat, price needs to be rising at a steady rate. If ROC is rising, this indi-
cates that price is accelerating, with respect to prices N periods ago.
As per any oscillator, the ROC may be analyzed for buy (bullish) and sell
(bearish) signals using any of the eight forms of oscillator analysis described in a
previous section. See Figure 8.18. We see the ROC remaining flat during a con-
stant rate of ascent in price, as expected. We also see the ROC declining as prices
start to range. Note that the zero line crossovers indicate buy and sell signals and
the historically overbought levels, at Points 1 to 3, forecast tops and bottoms ac-
curately on the daily chart of Goldman Sachs Group Inc. Notice how the ROC
momentum oscillator reverses before price at Points 1 to 3. This is the most im-
portant and useful characteristic of momentum oscillators.
MOM (tracking Momentum via the Difference Method)
Momentum can also be tracked using the difference method. Instead of calculating
the ratio as in an ROC oscillator, the MOM tracks the price difference over the last
N periods. Although the MOM usually uses closing prices, some practitioners also
use typical price, midprice, and weighted close prices. The general MOM formula is:
MOM Latest Price Price= − Nperiods back