V.12:10 (403-405): The Rate Of Change Indicator by Bruce R. Faber

V.12:10 (403-405): The Rate Of Change Indicator by Bruce R. Faber
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The Rate Of Change Indicator by Bruce R. Faber

The rate of change is an indicator that measures the pace at which price is changing. Tracking the rate of the change of price can confirm trends and forewarn of market reversals. Here, then, are some guidelines for using this popular indicator.

One of the simplest of all indicators to understand and use is the rate of change indicator (ROC). That the idea is simple in no way negates its effectiveness; it is a basic tool, which when used with other tools helps to determine the most opportune buy and sell points for a given security. There has been no one person identified as having developed this oscillator, but because of the oscillator's effectiveness, the indicator is very popular among traders and market analysts.

The ROC can be applied to price, volume or other indicators such as moving averages. Here, we will use the rate of change indicator on a security. ROC compares a security's current price to the price n days previous. The number of days to use for n varies, depending on traders' time horizons for holding trades and how the volatility of the security is determined. There are three ways to compare today's price relative to the price n days ago.

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