Technical Indicators: Rate of Change (ROC) and Momentum
Momentum and Rate of Change (ROC) indicators actually display the exact same information. The indicators are designed to measure the optimism or pessimism of investors in the market with regards to the stock in question. The way they do this is by measuring the closing price of a stock relative to the closing price of a stock x number of days ago. On bigcharts.com, this indicator is set to a 10 day period. So, what you would see if you were using bigcharts, is the ratio Close/Close-10-days-ago used to create the Momentum graph and the ratio scaled by multiplying by 100 to yield the ROC graph which you can see below.
As usual, I have graphed the price chart and volume chart followed by the ROC chart and then the Momentum chart. It is pretty obvious that the two bottom charts look exactly the same but with a different scale on the y-axis. Thus, you can use either ROC or momentum interchangeably but never together. As with stochastics, the momentum and ROC indicators on bigcharts.com tend to be more of a short-term bull or bear signal due to their short period. A charting program which would allow longer periods (maybe 4-week or 26-week periods) would likely be more helpful for most people. That being said, once can still use a shorter term indicator to time specific buy and sell points after coming to a conclusion about the long term potential of the stock using other sources.
The ROC and momentum graph are a little bit more difficult to use than other technical indicators because there are no real hard and fast rules about whether or not the indicator is signalling that the stock is overbought or oversold. Generally, these lines are drawn based on previous highs and lows. The easiest way to use the ROC is to watch for its trend reversals. The ROC is designed with the hope of having it’s trend break before that of the price chart and this will likely give you early notice on price movements. Unfortuately, with the 10-day period on bigcharts, this indicator is like other short term indicators very sensitive to day-to-day price movements and is not always significantly ahead of the price curve. The final way to read the ROC curve is to look for zero-line crossovers. Crossing up over the zero-line is a sign that the stock is turning bullish and in an uptrend and crossing below the zero-line is a sign that the stock is in a downtrend and turning bearish.
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