The theory behind using this oscillator in FX trading is simple and straightforward:

How to Use the ROC Indicator

If a price is rising (or falling) very quickly there will soon come a time when it is thought to be overbought (or oversold). When this happens the price can still continue to rise (or fall), but not as rapidly as it was before and eventually a contrary trading opportunity will present itself.

12- and 25-day ROC are most used numbers and a 12-day ROC is seen as a good short-term and medium-term indicator of overbought and oversold. The indicator fluctuates above and below the zero line as the Rate of Change moves from positive to negative.

ROC is used in the same way as other momentum oscillators momentum and can be used in currency trading to look for higher lows, lower highs, positive and negative divergences, and crosses above and below zero to help time trading signals.

In terms of market psychology, the momentum and ROC allows you to see today's consensus of value to a previous consensus of value and see how the prices compare and the degree of greed or fear which is present from the participants.

Calculation of ROC

ROC only has one parameter, n, that specifies the number of periods over which the closing prices should be compared. You can find the speed of price change by looking at the difference between current closing price and the closing price n periods ago thus:

ROC = ((CLOSE (i) - CLOSE (i - n)) / CLOSE (i - n)) * 100

Where:

CLOSE (i) — the closing price of the current bar

CLOSE (i - n) — the closing price n bars in the past

ROC — the value of Price Rate of Change indicator.

In Conclusion

The ROC indicator is easy to understand and apply and can be used in currency swing trading or trend following, to gain a better insight to market value and the psychology of the participants and is a trading tool all currency traders should study.