RoC is calculated by comparing the current price with the price 'n' periods ago. For example, a 10 period RoC would be calculated as follows: ROC = 100 * (today's close - close 10 periods ago)/(close 10 periods ago).
The plot forms an oscillator that fluctuates above and below the zero line as RoC moves from positive to negative. The oscillator can be used as any other momentum oscillator by looking for higher lows, lower highs, positive and negative divergences; and crosses above and below zero for signals.
RoC can be very useful because it is a leading indicator (RoC changes direction before the underlying price). It is also referred to as price rate of change (PRoC).
It is a price momentum or velocity indicator. A rising RoC indicates a bullish increasing momentum whereas a falling RoC indicates a bearish decreasing momentum. RoC is always used in conjunction with reversal signals on the price chart.
The lower the RoC, the more undersold the market is and the more likely a recovery; the opposite holds true in case of a higher RoC. However, both extremes can indicate the formation of a sideways channel.
Divergences on the RoC chart can provide warnings or alerts of weaknesses in market trends, but do not represent actual buy or sell signals. It is essential to wait for a confirmation from the price itself that the overall trend has reversed.
Though the long-term price trend is still the overriding consideration, a crossing upward through the zero line can confirm a buy signal and a crossing downward through the zero line will confirm a sell signal.
Given below is a chart depicting ICICI Bank
