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.
...Continued in the April issue of Technical Analysis of STOCKS &
COMMODITIES
Excerpted from an article originally published in the April 2007
issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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