Stocks & Commodities V. 25:4 (26-30): Two-Point Problem Of The Rate Of Change by Martti Luoma and Jussi Nikkinen

Stocks & Commodities V. 25:4 (26-30): Two-Point Problem Of The Rate Of Change by Martti Luoma and Jussi Nikkinen

Here’s a look at a modified version of the rate of change indicator, free of its detracting problem.

The rate of change indicator (ROC), one of the best-known oscillators in technical analysis, is an important measure of momentum. It describes the rate at which price changes occur. ROC can be defined as a relative change. This definition of the percentage change provides a natural and commonly used way to measure changes in business and economics. Given the intuitiveness and predictive power of ROC, it is not surprising that it has become such a popular indicator in technical analysis.

There is a downside to the rate of change indicator, of course, and it is that the actual applications of the indicator suffer from some problems related to the lack of natural smoothing, loss of important relevant information, and the misinterpretation of information. In this article we discuss the major problems associated with the use of ROC and present a new version free from these problems.

The Rate of Change Indicator

It is well known that the nomenclature in technical analysis is inconsistent, and so it should come as no surprise that this also holds true for the ROC. First, we will define the rate of change indicator as...