Rate of Change

Rate of Change (ROC) is a pure momentum oscillator that measures the percentage change in price between the current period and a specified number of periods ago, displayed as a line oscillating around zero in a lower indicator panel. Unlike other momentum indicators that use complex calculations, ROC’s simplicity is its strength – it directly shows whether price is accelerating or decelerating and by how much. For option traders, ROC excels at identifying when moves are becoming overextended or when momentum is shifting, providing clear signals for selling premium at exhaustion points. The percentage-based calculation makes ROC particularly valuable for comparing momentum across different-priced stocks.

How ROC Works

ROC uses straightforward percentage math:

The Calculation

ROC = [(Current Price – Price N periods ago) / Price N periods ago] × 100

  • Default period: 10 or 14
  • Expressed as percentage
  • Positive = price higher than N periods ago
  • Negative = price lower than N periods ago

Reading ROC Values

  • Above 0: Upward momentum (bullish)
  • Below 0: Downward momentum (bearish)
  • Rising ROC: Accelerating momentum
  • Falling ROC: Decelerating momentum
  • Extreme readings: Vary by stock volatility

No fixed overbought/oversold levels – context dependent.

ROC Characteristics

Understanding this lower indicator’s behavior:

Momentum vs Price

  • Price can rise while ROC falls (slowing momentum)
  • Price can fall while ROC rises (slowing decline)
  • ROC peaks before price peaks
  • ROC troughs before price troughs

This leading quality makes ROC valuable for timing.

Volatility Relationship

High Volatility Stocks:

  • ROC swings ±10-20% regularly
  • Wider extremes normal
  • Need larger readings for signals

Low Volatility Stocks:

  • ROC swings ±3-5% typically
  • Smaller extremes significant
  • Tighter readings for signals

Always consider individual stock behavior.

ROC Signals for Options

Key signals from this momentum indicator:

Zero Line Crosses

Bullish Cross:

  1. ROC crosses above zero
  2. Momentum turns positive
  3. Uptrend potentially starting
  4. Focus on selling puts

Bearish Cross:

  1. ROC crosses below zero
  2. Momentum turns negative
  3. Downtrend potentially starting
  4. Focus on selling calls

ROC Extremes

Overbought (Stock Dependent):

  • ROC reaches unusually high level
  • Compare to recent history
  • Momentum unsustainable
  • Consider selling calls

Oversold (Stock Dependent):

  • ROC reaches unusually low level
  • Extreme negative momentum
  • Bounce likely
  • Consider selling puts

ROC Divergences

The most powerful ROC signals:

Bearish Divergence

Classic Setup:

  • Price makes higher high
  • ROC makes lower high
  • Momentum not confirming
  • Reversal down likely

Option Play: Sell calls at resistance

Bullish Divergence

Classic Setup:

  • Price makes lower low
  • ROC makes higher low
  • Selling momentum waning
  • Reversal up likely

Option Play: Sell puts at support

Divergences often provide early warning of reversals.

Advanced ROC Patterns

Beyond basic signals:

ROC Thrust

Bullish Thrust:

  • ROC jumps from negative to very positive
  • One or two bar move
  • Explosive momentum shift
  • New trend starting

Bearish Thrust:

  • ROC drops from positive to very negative
  • Rapid momentum reversal
  • Breakdown beginning
  • Trend change confirmed

ROC Smoothing

Apply moving average to ROC:

  • 3-period MA smooths noise
  • 9-period MA for major turns
  • Crossovers provide signals
  • Reduces whipsaws

ROC Settings for Options

Optimizing for different timeframes:

Period Selection

Short-term (5-10 periods):

  • More signals
  • Weekly options
  • More false signals
  • Active management

Medium-term (14-21 periods):

  • Balanced approach
  • Monthly options
  • Reliable signals
  • Standard setting

Long-term (50+ periods):

  • Major trend changes
  • LEAPS/investing
  • Very smooth
  • Rare signals

Multiple ROC Strategy

Use two ROC periods:

  • 10-period for entry timing
  • 21-period for trend confirmation
  • Both positive = strong bull
  • Both negative = strong bear

ROC for Weekly Options

Applying this lower indicator short-term:

Weekly Settings

  • 5-period ROC on daily chart
  • 10-period ROC on hourly chart
  • ±5% typical extremes
  • Quick reversal trades

Scalping with ROC

For 0-1 DTE:

  • 14-period ROC on 5-minute
  • Zero line crosses for direction
  • Extremes for reversals
  • Multiple trades daily

Combining ROC with Price

Context enhances signals:

ROC + Support/Resistance

High Probability:

  • Oversold ROC + major support
  • Overbought ROC + major resistance
  • Technical confluence
  • Clear risk levels

ROC + Moving Averages

Trend Confirmation:

  • Price above MA + ROC positive = Strong uptrend
  • Price below MA + ROC negative = Strong downtrend
  • Divergences more significant
  • Filter false signals

ROC + Volume

Power Combination:

  • ROC extreme + volume spike = Exhaustion
  • ROC thrust + high volume = New trend
  • Confirms momentum quality
  • Institutional participation

ROC Screening

Finding opportunities:

Daily ROC Scan

  1. ROC at 3-month extreme
  2. Near support/resistance
  3. Liquid options available
  4. No earnings pending
  5. Monitor for reversal

Divergence Scanner

  • New highs with falling ROC
  • New lows with rising ROC
  • Clear divergence patterns
  • Premium selling candidates

Common ROC Mistakes

Fixed Extreme Levels: Each stock different Ignoring Trend: Context matters Too Short Period: Excessive noise No Confirmation: ROC alone insufficient

Building a ROC System

Systematic approach:

ROC Reversal Strategy

Entry Rules:

  1. Identify stock’s normal ROC range
  2. Wait for extreme reading
  3. Confirm with price structure
  4. Enter option position
  5. Stop if ROC continues extreme

Management:

  • Exit at ROC zero cross
  • Take profits at 50%
  • Trail using ROC levels
  • Track by ROC extremes

Backtest Parameters

  • Optimal ROC period
  • Extreme levels by stock
  • Hold time analysis
  • Win rate by setup

ROC vs Other Momentum Indicators

Comparing effectiveness:

ROC Advantages

  • Simple calculation
  • Percentage-based (comparable)
  • No bounded limits
  • Clear momentum measure

ROC Disadvantages

  • No fixed extremes
  • Can be choppy
  • Requires context
  • Less popular

Many traders use ROC to confirm other indicators.

Key Takeaways

Rate of Change (ROC):

  • Lower indicator measuring momentum percentage
  • Oscillates around zero
  • Positive = upward momentum
  • Negative = downward momentum
  • No fixed overbought/oversold
  • Excellent for divergences
  • Simple but effective

ROC is the option seller’s speedometer, showing not just direction but how fast price is moving relative to its history. This lower indicator’s percentage-based calculation allows easy comparison across different stocks and timeframes. Master ROC divergences and extremes to identify when momentum is exhausting and reversals are likely. Remember: ROC shows the rate of change, not the destination – use it to gauge whether moves are accelerating or running out of steam.