Understanding Rate of Change (ROC):
Rate of change is used to mathematically describe the percentage change in value over a defined period of time, and it represents the momentum of a variable. The calculation for ROC is simple in that it takes the current value of a stock or index and divides it by the value from an earlier period. Subtract one and multiply the resulting number by 100 to give it a percentage representation.
ROC = ( current value X - 1 ) x 100
previous value
The Importance of Measuring Rate of Change:
Rate of change is an extremely important financial concept because it allows investors to spot security momentum and other trends. For example, a security with high momentum, or one that has a positive ROC, normally outperforms the market in the short term. Conversely, a security that has a ROC that falls below its moving average, or one that has a low or negative ROC is likely to decline in value and can be seen as a sell signal to investors.
Rate of Change and Its Relationship With Price:
The rate of change is most often used to measure the change in a security's price over time. This is also known as the price rate of change (ROC). The price rate of change can be derived by taking the price of a security at time B minus the price of the same security at time A and dividing that result by the price at time A.
Price ROC = B - A X 100
A
Where:
B = price at current time
A = price at previous time
Rate of change is used to mathematically describe the percentage change in value over a defined period of time, and it represents the momentum of a variable. The calculation for ROC is simple in that it takes the current value of a stock or index and divides it by the value from an earlier period. Subtract one and multiply the resulting number by 100 to give it a percentage representation.
ROC = ( current value X - 1 ) x 100
previous value
The Importance of Measuring Rate of Change:
Rate of change is an extremely important financial concept because it allows investors to spot security momentum and other trends. For example, a security with high momentum, or one that has a positive ROC, normally outperforms the market in the short term. Conversely, a security that has a ROC that falls below its moving average, or one that has a low or negative ROC is likely to decline in value and can be seen as a sell signal to investors.
Rate of Change and Its Relationship With Price:
The rate of change is most often used to measure the change in a security's price over time. This is also known as the price rate of change (ROC). The price rate of change can be derived by taking the price of a security at time B minus the price of the same security at time A and dividing that result by the price at time A.
Price ROC = B - A X 100
A
Where:
B = price at current time
A = price at previous time