Hello guys, It's all good participating in this class presided by Prof @kouba01 with lessons on Rate Of Change Indicator. I will be making my submission as required.
1- In your own words, explain the ROC indicator with an example of how to calculate its value? And comment on the result obtained.
Rate Of Change (ROC) Indicator
The Rate Of Change (ROC) Indicator is an all-important trading indicator that captures the percentage readings of Price relative to its Current Price and to its Price at a given period. It is observed to be achieved by deriving its value by percentage changes to ascertain its course over time. Price movement can be determined through this ROC indicator by knowing when we have newborn trends (Start-ups trends) or when they are ranging, its strength or weakness as well possible trend reversals or trend continuity.
These are supposedly some important essentials to note in given trade activities to guide an investor/Trader. In determining the ROC, it can be observed to be Negative which is an indication of a downtrend, or Positive ROC which signifies a possible Uptrend. Its readings are seen to majorly overs at the midpoint which is the 0 bands level.
This very indicator is also observed to pick some important signals which include the Overbought and Oversold trend levels which represent either a bull or bear movement moving outside the equilibrium regions with observed high or low peaks. Secondly, it also indicates Cross-overs which primarily shows the trend at which it crosses the 0 mid-point upward or downwards. And thirdly, the Continuation or Reversal trend where the established trend is observed to correlate with indictor or in divergence.
Calculating the ROC Indicator
The mathematical representation of the ROC indicator goes this way;
ROC = [(Current Price - Price of a Given period)/Price of a Given period] x 100
This formula is likened to that of the simple percentage performance of a given asset where we drive the price of the current relative to the past price.
Let's take for example, if the Current price of Moonriver is $430 and its price in the last 12 periods is $391. The ROc Indicator value would be calculated by;
ROC = [(430 - 391) /391] x 100
ROC -= (39/391) x 100
ROC = 0.0997 x 100
ROC = 9.97%
This clearly shows from the calculation that we had a positive ROC where the price of MOVR/USDT increased by 9.97% in the last 12 periods. This represents a positive shift of asset price from $391 to $430.
2- Demonstrate how to add the indicator to the chart on a platform other than the tradingview, highlighting how to modify the settings of the period(best setting). (screenshot required)
I will be demonstrating this process using the Houbi Global Exchange platform.
- Launch your Houbi Exchange on your device
- From the top screen , Click on the index option from the top screen
- The search for the ROC indicator and click on it
- This would be automatically added to the chart screen as seen
- In adding some of its best settings, we already know that 12/25 periods are suitable for short and Mid/Long term trades respectively. In doing so, from the ROC indicator, click on the settings on the indicator.
- For the Input section, you can now change the setting to 12 or 25 periods depending on one use
- From the Style section, we can also change to our preferred color in identifying the ROC indicator.
All screenshots are from the Houbi Global site
3- What is the ROC trend confirmation strategy? And what are the signals that detect a trend reversal? (Screenshot required)
Just as explained earlier on the Rate of Change indicator and how it's used, the ROC confirms trend movement by its ability to determine the percentage difference of that asset in a given period. This can be ascertained by the movement of its readings below or above the Midpoint level 0. Due to the trend movements, there is bull and bear trends observed in every given market. When this oscillator is seen above the Mid-point 0, this signifies a Positive ROC and bullish trend, and when it's observed below the Mid-point 0 levels, it signifies a Negative ROC value and a bearish trend.
The more we observed the sharp break of this indicator above the 0 level bands, this continually shows Strong trend strength and the bullish reaction of price action at that given period whereas when this indicator is observed below the Mid-point, it also shows weak trend strength of a bearish reaction of price action.
The ROC can as well indicate the Divergence of Price movement which helps to identify much earlier the weakness of strength of trend before market corrections are observed. Both price trend and ROC indicator lines do not correlate at this period but hence still love a good trade signal.
ROC and Trend Reversal
Just from the lessons we know that the ROC indicator can be used in determining asset overbought and Oversold Signals. These are key important signals used by traders to anticipate trend reversals. At this point traders can anticipate reversals wither due to resistance levels ascertained or due to weak trends ( lesser Demand or buy activities to support trend).
Therefore trend reversals in ROC correlates directly with overbought and Oversold levels in a given asset.
All screenshots are from the Houbi Global site
4- What is the indicator’s role in determining buy and sell decisions and identifying signals of overbought and oversold؟(screenshot required)
Determining Buy and Sell Signals using ROC
The ROC indicator guides the trader in determining the Buy and Sell signal by the use of its oscillating indicator line at the Mid-point 0 value. The behavior of this line below or above the Mid-point 0 bands determines how best a user can make a trade position for a buy or sell signal. When the indicator gives smother signals where the ROC is observed above the mid-point 0 bands, the stronger the market trend relative to the positive percentage change in the current price of the asset. This scenario is verse visa when indicator line is found below the mid-point 0 bands as this comes with a weak market trend relative to the negative percentage change in the current price of the asset.
For a BUY Scenario, when the ROC indicator approaches the Mid-point 0 band and hence crosses above the midpoint, the BUY order should be taken in the trade. But we should wait to confirm a little trend retest (Bearish trend) before maintaining previous trend continuation to validate BUY order position.
For a SELL Scenario, when the ROC indicator approaches the Mid-point 0 band and hence crosses below the midpoint, the SELL order should be taken in the trade. But we should wait to confirm a little trend retest (bullish trend) before maintaining previous trend continuation to validate the SELL order position.
Overbought and Oversold Signals
The best way to identify these trading signals is primarily by identifying the Resistance and Support levels of a market trend where we relatively have an absence of market trend activities. Alternatively, traders can as well use the percentage indicator lines of -/+ 3 to 4% for Overbought and Oversold level bands.
For an Overbought Scenario the indicator line is positively observed far from the Mid-point 0 bands level and above at which there is a relative absence of market trend activities and valid resistance point in view. This can also be clearly determined where we have the percentage change readings observed between the +3 to 4% levels.
For an Oversold Scenario the indicator line is negatively observed far from the Mid-point 0 bands level and below at which there is a relative absence of market trend activities and valid support point in view. This can also be clearly determined where we have the percentage change readings observed between the -3 to 4% levels.
All screenshots are from Huobi Global sites
5- How to trade with a divergence between the ROC and the price line? Does this trading strategy produce false signals? (screenshot required)
Divergence in the ROC indicator simply means that the Indicator line is not directly correlating with the trade or price movements. Price trends and Indicators are not following the same direction at a given market period. These are veritable trade signals that give early market corrections for a guided trade position.
Bullish Divergence in ROC indicator
In this scenario, we have the price trend in the trade following a bearish trend whereas the ROC indicator is observed to show Bullish signals. This early signal showing a bullish ROC indicator anticipates that the bearish price movement is losing trend strength to continue with price action and hence would probably reverse or correct itself.
Bearish Divergence in ROC indicator
In this scenario, we have the price trend in the trade following a bullish trend whereas the ROC indicator is observed to show Berish signals. This early signal showing a bearish ROC indicator anticipates that the bullish price movement is losing trend strength to continue with price action and hence would probably reverse or correct itself.
False Signals in ROC Indicator
There is no stand-alone indicator that can guarantee 100% trading efficiency rather they are best if combined with other technical indicators. There may be scenarios where these early signals of divergence would occur but the market would still maintain trend continuation. If traders who already anticipated market reversals make open trade positions are liable to lose staked assets. Hence there are possibilities of false signals in the use of this strategy. However, these can be ameliorated if traders combine indicators in use with other technical indicators to remove falseouts false signals.
6- How to Identify and Confirm Breakouts using ROC indicator? (screenshot required)
Breakouts in trade events simply represent high trend momentum observed when price trend breaks a given Support or Resistance level. This is characterized by a long or thick candlestick observed in trade whichcan be either bullish or bearish in form. This breakouts seen are internal trade activities which are characterized by strong buy or sell activities observed in investors behavior at a given moment .
In the ROC indicator, we observe a sideways movement to which the ROC line intereacts more regularly between the mid-point 0 line bands. The ROC line is observed to move in a range below the mid-point level as Support and above the the mid-point level band as resistance points before making a shot-out or steep break. This sharp or steep break is what is reprented as the Breakout observed in an ROC indicator.
The screenshot above simply shows the a typical illustration of the breakout scenario. The price action was observed in a range after a while before the breakout scenario. Same scenario was also observed with the ROC line where it hovered between the upper and lower mid-point 0 band before making a steep breakout from mid-point 0 band levels.
All screenshots used are form he Huobi global site
- Review the chart of any crypto pair and present the various signals giving by ROC trading strategy. (Screenshot required)
Buy Signal in ROC Indicator
In the Buy signal scenario we are expected to see price movement coming from the oversold region and approaching the mid-point band level of the ROC indicator. When this line is observed to cross the mid-point 0 band level and continue with a bull trend , the Buy signal is expected tp be taken. We can as well confirm and validate our position if trend is observed to retest and still correct itself with initial bullish trend.
From the screenshot above, we can clearly observed ROC line was seen approaching the mid-point 0 level band with a cross above this mid-point and bull movements. There is Trend Retest before trend still continued on its bull run to validate trade positions. Breakout point was observed at 41,348 with BUY order position taken at 43,859 when trend position has been validated for a bullish trend. Our Reward and Risk ratio was kept at 1:1 ratio to maintain a low risk with STOP LOSS at 38,359 and TAKE PROFIT at 46,907.
Sell Signal in ROC Indicator
In the Sell signal scenario we are expected to see price movement coming from above of the overbought region and approaching the mid-point band level of the ROC indicator. When this line is observed to cross the mid-point 0 band level and continue with a bear trend , the Sell signal is expected to be taken. We can as well confirm and validate our position if trend is observed to retest and still correct itself with initial bearish trend.
From the screenshot above, we can clearly observed ROC line was seen approaching the mid-point 0 level band with a cross below this mid-point and bear movements. There is a trend Retest before trend still continues on its bear run to validate trade positions. Breakout point was observed at 61,030 with SELL order position taken at 60,680 when trend position has been validated for a bearish trend. Our Reward and Risk ratio was kept at 1:1 ratio to maintain a low risk with STOP LOSS at 64,313 and TAKE PROFIT at 58,492.
The ROC indicator is observed as an important trading indicator for use due to its ability to determine a new trend as soon as it is borne in a trade as well as indicating its momentum or strength with anticipated market correction or reversal in view. It allows for easy calculation of the percentage changes of the current price of an asset over a given period of time. The ROC indicator calculates this by having its short term periods on 12 and its Mid /Long term periods on 25 for traders (short term) and investors (Mid/Long term).
It also take into cognizance the Overbought and Oversold levels of assets by also determining the Resistance and Support regions where there are relative absence of trend activities. ROC indicator , just like other trading indicators would produce more effective and efficient readings/outcomes when combined with other trading indicators.
Thank you prof @kouba01 for your lessons