This indicator displays the rate-of-change of a security’s price. Change is displayed as a percentage rather than as a ratio.
ROC is calculated by dividing the price change over the last n-periods by the closing price n-periods ago. This gives you percentage that the price has changed in the last n-periods.
When the 10-day ROC line is above the central line, the price is higher today than it was 10 periods ago. When the ROC line is below the central line, the price is lower today than it was 10 days ago. If the ROC line is above the central line, the price is higher than it was 10 days ago. If the ROC line is below the central line but rising, the price is still lower today than it was 10 days ago, but the range is narrowing.
The 12-day ROC is best used as a short to intermediate-term overbought/oversold indicator. The higher the ROC, the more overbought the security; the lower the ROC, the more likely a rally. However, as with all overbought/oversold indicators, it is best to wait for the market to begin to correct (i.e., turn up or down) before placing your trade. A market that appears overbought may remain overbought for some time. In fact, extremely overbought/oversold readings usually imply a continuation of the current trend.
The 12-day ROC tends to be very cyclical, oscillating back and forth in a fairly regular pattern. Often, price changes can be anticipated by studying the previous cycles of the ROC and relating the previous cycles to the current market.
The optimum overbought/oversold levels (e.g., +/-5) will vary depending on the security being analyzed and overall market conditions. In strong bull markets, it is usually beneficial to use higher levels, perhaps +10 and -5.