Generally speaking, a Rate of Change (ROC) describes how one quantity changes in relation to another quantity. The ROC indicator determines the current price direction in the binary options market. The indicator can be used to spot divergences, overbought and oversold conditions, and centerline crossovers.
Traders always want to know what direction market will go that is why indicators and oscillators are very helpful. Pocket Option trading platform offers ROC among many other preinstalled features.
Tips for settings of ROC indicator
The Price Rate of Change (ROC) is classed as a momentum or velocity indicator because it measures the strength of price momentum by the rate of change.
Activate it in your account by selecting and clicking on the ROC indicator in the menu.
Like most momentum oscillators, the ROC appears on a chart in a separate window below the price chart. The ROC is plotted against a zero line that differentiates positive and negative values. Positive values indicate upward buying pressure or momentum, while negative values below zero indicate selling pressure or downward momentum. Increasing values in either direction, positive or negative, indicate increasing momentum, and moves back toward zero indicate waning momentum.
The Formula for the Price Rate of Change Indicator Is:
RoC = (C / Cn) * 100
C means Closing Price of the Most Recent Period
Cn means Closing price n periods before most recent period
The value will be updated with the appearance of each next bar.
Therefore, the indicator will react in time to any price change and will not lag behind.
It is recommended to use periods 9 to 13 and timeframes from 15 minutes to 4 hours.
It is not recommended to use ROC in turbo options because it is too sensitive that is why it generates a lot of false signals.
More advice on using the ROC indicator
The Price Rate of Change (ROC) oscillator is an unbounded momentum indicator used in technical analysis set against a zero-level midpoint.
A rising ROC above zero typically confirms an uptrend while a falling ROC below zero indicates a downtrend.
When the price is consolidating, the ROC will hover near zero. In this case, it is important traders watch the overall price trend since the ROC will provide little insight except for confirming the consolidation.
Buy contracts only in the direction of the trend.
Do not trade flat.
Open positions when you are confident about a breakout.
How to trade binary options using the Rate of Change?
Let us discuss how to use the ROC indicator in binary options trading. When you understand basics, it is rather simple.
Watch for the signal to open a deal when the moving average crosses the zero level.
- Buy a CALL contract on an uptrend when the line is crossing the zero from bottom to top.
- PUT contract on a downtrend when the signal line crosses the zero level from top to bottom.
Recommendation: set the expiration of 2-3 candles.
ROC is also commonly used as a divergence indicator that signals a possible upcoming trend change. Divergence occurs when the price of a stock or another asset moves in one direction while its ROC moves in the opposite direction. For example, if a stock’s price is rising over a period of time while the ROC is progressively moving lower, then the ROC is indicating bearish divergence from price, which signals a possible trend change to the downside. The same concept applies if the price is moving down and ROC is moving higher. This could signal a price move to the upside. Divergence is a notoriously poor timing signal since a divergence can last a long time and won’t always result in a price reversal.
While the indicator can be used for divergence signals, the signals often occur far too early. When the ROC starts to diverge, the price can still run in the trending direction for some time. Therefore, divergence should not be acted on as a trade signal but could be used to help confirm a trade if other reversal signals are present from other indicators and analysis methods.