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The Rate of Change (ROC) indicator is a very simple yet effective momentum oscillator that measures the percent change in price from one period to the next. The ROC calculation compares the current price with the price n periods ago.
ROC = ((Today's close - Close n periods ago) / (Close n periods ago)) * 100
The plot forms an oscillator that fluctuates above and below the zero line as the Rate of Change moves from positive to negative. The oscillator can be used as any other momentum oscillator by looking for higher lows, lower highs, positive and negative divergences, and crosses above and below zero for signals.
The chart of Lucent shows that a large negative divergence formed in Dec-99 and the ROC moved into negative territory just before the large decline. While this was a superb sell signal, the ROC can produce whipsaws as it moves above and below zero. As with most technical indicators, ROC should be used in conjunction with other aspects or technical analysis as well as other non-momentum based indicators.
There is another popular indicator called "Momentum" that is almost identical to the Rate of Change indicator. The only difference is that the Rate of Change indicator adds 100 to the ROC's value. Momentum also uses 100 as its center line instead of zero like the ROC. Because both indicators give identical signals, StockCharts.com has choosen to only implement the Rate of Change version. People that are used to using the Momentum indicator can simply replace that with the ROC indicator on their charts.
