RoC Indicator for Short-term and Long-term Trading

RoC (Rate of Change) is a momentum indicator that can be utilized for short-term trading as well as long-term trading. What are the setups?

One technical indicator that can identify changes in price and strong market trends is the Rate of Change (RoC). This momentum indicator is calculated based on the percentage change in price.

In long-term trading strategies, the RoC indicator can help traders identify strong market trends and price momentum. Meanwhile, the RoC indicator can also be adjusted for short-term strategies to have a quick response to price changes in a short period of time.

In this review, we will discuss long-term and short-term trading strategies using the RoC indicator.

How the RoC Indicator is Formulated

The RoC indicator measures the percentage change in the current price compared to the previous period's price. Therefore, it can help traders identify trends and momentum changes. The larger the RoC figure, the faster the price changes.

When RoC experiences a sharp increase, this can be a potential Buy signal. Conversely, when RoC sharply decreases, this can be a Sell signal.

Here is the formula for calculating the RoC indicator:

ROC = [(Closing Price – Closing price N periods ago)/ Closing price N periods ago] x100

Where:

• Closing price = closing price of the last day or the most recent period.
• Closing price N periods ago = the closing price of how many periods back the current price is compared to.

If the current price of an asset is $50 and the price 10 periods ago was $40, then the RoC calculation for that period is as follows:

RoC = [(50 - 40) / 40] x 100 = 25

This means that in the last 10 periods, the price of an asset has increased by 25%.

The time period used to calculate RoC can vary depending on user preferences. Typically, the most commonly used time periods are 9, 14, or 25. The shorter the period, the faster the price changes reflected in the RoC indicator.

How to Use RoC Indicator for Forex Trading

Here are the steps traders can follow in using the RoC indicator:

1. Choose a forex pair: Select a currency pair with sufficient volatility to trade.
2. Determine the time frame: Use a suitable time frame for long-term or short-term trading; it depends on personal preference.
3. Use RoC indicator: Set the RoC indicator with a period according to the time frame. Shorter periods like 9 or 12 are suitable for short-term trading, while longer periods like 25 or 50 are typically for long-term trading.
4. Wait for the Buy or Sell signal: If RoC crosses 0 from top to bottom, it indicates strong negative momentum and can be a sell signal. The opposite applies if the indicator crosses 0 from below.
5. Open a position: After getting a Buy or Sell signal from the RoC indicator, traders can open a Buy or Sell position according to the trend direction.
6. Set the stop loss: Use a suitable stop loss to limit losses if the price moves against the position.
7. Place take profit: Determine a suitable profit level to automatically close the position when the price reaches the target profit.
8. Monitor the positions: Check positions regularly to make sure they are still in line with the current market conditions. If there are changes in the trend or momentum, adjust the strategy or close the position.

Short-term Trading Strategy with RoC Indicator

For scalpers and day traders, here's an example of short-term trading using the RoC indicator:

• Select a pair, for example, GBP/USD.
• Determine a short-term time frame (M15 or M30).
• Use the RoC indicator with a period of 10 or 14.
• Wait until the RoC indicator shows a strong Buy or Sell signal.
• If RoC shows a strong decrease, you can open a Sell position on GBP/USD.
• Place a stop loss above the nearest resistance to limit losses.
• Set a profit target following your risk/reward ratio.
• Don't forget to monitor the positions.

For a clearer picture, please see the image below:

Long-term Trading Strategy with RoC Indicator

Swing traders and position traders can also use the RoC indicator to confirm entry positions. To understand more, follow the steps below:

• Select a pair, for example, EUR/USD.
• Determine a time frame (H4 or D1).
• Use the RoC indicator with a period of 25 or 50.
• Wait until the RoC indicator shows a strong Buy or Sell signal.
• If RoC shows a strong increase, you can open a Buy position on EUR/USD.
• Place a stop loss below the nearest support to limit losses.
• Set a profit target that is suitable to your risk/reward ratio.
• Don't forget to regularly monitor the positions.

To make it easier to understand, please see the image below.

Final Words

Overall, the RoC indicator can help traders identify market trends and price momentum across various trading instruments. Long-term trading strategies using the RoC indicator require patience and in-depth analysis of market conditions, as they are based on higher time frames. Meanwhile, short-term trading strategies require quick responses to price changes within shorter periods of time.

It is important to remember that there is no perfect trading strategy. Every trader must adjust their plans to the current market conditions and always pay attention to risk management in every trade they make.

When applying the RoC indicator strategy, traders should always conduct an in-depth analysis of market conditions and pay attention to external factors that may affect price movements. In fact, the RoC indicator will be much more effective when combined with other technical methods or fundamental analysis to obtain more accurate trading signals. In addition, test the strategy on a demo account first to avoid unnecessary risks.