Rate of Change (ROC): Potential Leverage Trading Gains
Key Questions Answered
- The Rate of Change is a type of momentum oscillator that calculates the rate of change in value over an n period; the default n value is “9”. By switching the timeframe we can get results for 9 months, 9 weeks, 9 days, or even 9 hours. The indicator could also be adjusted for 365 days to measure yearly performance.
- A crypto can be “overbought” if more traders are buying than selling and “oversold” if more traders are selling than buying. Momentum oscillator indicators measure these conditions.
- The ROC indicator can be combined with RSI and StochRSI indicators to identify overbought and oversold conditions. Values above +10 are overbought and -10 are oversold. Once we have insight into the price movement of crypto over a desired period, we can act upon this information by opening a long or short trade.
What is the Rate of Change Indicator?
The Rate of Change (ROC), is a technical indicator that measures the percentage of price changes over a period of time. It is one of the simplest indicators that can show us how Bitcoin (BTC) fluctuated from x period to y period. If the price of Bitcoin went up from $45,000 to $50,000 in the span of 9 days, this represents a 10% increase and the ROC indicator would show +10. A trader could adjust that to longer periods such as 365 days to see how Bitcoin performed over the year.
The ROC indicator, similar to other momentum oscillators, moves above or below a zero line”. This zero line is highlighted as “0” and all movement above it is considered positive while movement below is considered negative. Besides performance calculations, the rate of change indicator can be used for detecting “Overbought” or “Oversold” levels – similar to the Relative Strength Index (RSI) indicator. A trader can open long or short positions accordingly using a combination of these indicators.
Why Is The ROC Indicator Good For Leverage Trading?
The ROC oscillator locks in values over a certain period. In trend trading, a trader can ride the wave of a percentage move and multiply their gains. For example, if we have a 10% move in the price of Bitcoin we could multiply our profits to 100% using 10x leverage. The zero line on the ROC is often the crossover value that indicates the start of a new upward or downward trend:
Learn how to use the Rate of Change indicator for leverage trading.
Once Bitcoin moves above or below this line, a leverage trader could capitalize on it by buying contracts for a long or short trade. The illustration above shows a +14% price move once the ROC value moved above the zero line. If a trader opened a 10x leverage trade and held it until the peak, he’d stand to lock in 140% gains on the move.
What Is The Rate Of Change Formula?
The average Rate of Change definition was invented by Newton for calculus mathematics. It divides current x values with historic y values. The technical indicator is based on that formula and takes the spot price, then divides it by previous closes over an n period.
Here’s how to calculate rate of change
The indicator was first used in the stock markets, taking closing prices from trading days. As crypto is traded 24/7, the closing prices are the prices at 00:00 UTC when the daily candles reset. The “n” period is the calculation period for the ROC and is 9 by default. This period is user-defined and can be changed to any value.
A trader doesn’t have to know how to find the rate of change because this is done automatically for them. In the next section, we will guide you step-by-step to learn how to do rate of change on your own.
How To Find The Rate Of Change?
The ROC indicator is available for more than 200+ trading pairs including ETH/USDT, SOL/USDT and AVAX/USDT on trading platforms such as Phemex. For this example, we will use the Bitcoin chart.
1 Click on “Indicators” as highlighted below, search for “Rate of Change” and click on it to activate it:
Indicators are available on 200+ crypto trading charts.
Search for the ROC indicator to activate it.
2 The ROC indicator will be loaded below. The indicator now calculates ROC values for the last 9 days. We can see the percentage move based on the fluctuations above the zero line. Traders do not need to know how to determine rate of change as it’s automatically calculated:
The Rate of Change on the daily chart (with default settings).
3 The ROC indicator settings can be adjusted by hovering over “ROC 9” at the bottom left and clicking on “Settings”:
Press on the “Settings” button to specify the desired length.
4 The n values are user-defined. These can be changed to any length. We’ll adjust the period to 365 on the daily chart to get context about Bitcoin’s yearly performance:
ROC for 365 days indicates price fluctuations compared to the previous year.
Once adjusted for yearly values on the daily chart, we can see that Bitcoin provided 464% annual returns for traders in late 2021. Bitcoin peaked to an all-time high of $69,000. The analytics show that the current value is -22% which indicates a 22% decrease from where Bitcoin was trading last year, denoting a bearish year for Bitcoin so far.
What Is The Best Rate of Change Trading Strategy?
An effective ROC trading strategy is to use it for trend trading based on the zero line. The zero line is the mean value of the indicator. Once the oscillator moves above the zero line in positive territory, we can go long on Bitcoin and anticipate a price increase. Switch to a short-term chart such as 4H (hourly) to understand how you could trade with the ROC:
A trader could purchase or sell according to the ROC oscillator.
Use the ROC Oscillator with RSI and StochRSI
Simply put, buy when the line goes above the mean value. Sell when the value goes below the mean value. However, Bitcoin is highly volatile and the indicator could send false signals, which is why we can get reassurance by combining it with other oscillator indicators such as RSI and StochRSI:
The ROC, StochRSI, and RSI indicators combined.
The StochRSI indicator places weight on recent price data using Exponential Moving Averages (EMAs) while the RSI indicator uses Simple Moving Averages (SMAs) to derive long-term data. The moving averages can indicate when Bitcoin is overbought or oversold.
The StochRSI will oscillate a lot faster between overbought and oversold levels. At the moment, StochRSI shows extreme overbought levels for Bitcoin which indicate that the price is bullish but could see bearish divergence. The RSI indicator oscillates sideways near bearish territory that indicates it’s more oversold than overbought–but could go in either direction.
If we use the ROC zero-value strategy, we could short Bitcoin at the moment because the oscillator moved below the zero value on the daily chart. However, the RSI indicator issued a warning that this trend is not likely to continue and a trader should promptly close their short because it’s trading near historic support levels.
Long-Term Rate of Change Trading
To derive context about long-term price fluctuations, we can use indicators that take long-term values such as the Coppock Curve and the Klinger Oscillator. These indicators rely on 10-month and 14-month moving averages that can tell us a possible future direction based on historic averages:
The ROC, Coppock Curve, and Klinger Oscillator indicators combined.
We start by changing the ROC values to 365 days and activating these two indicators. The Coppock Curve shows that Bitcoin has bounced from historic support levels and is on an uptrend.
The Klinger Oscillator is famous for the signal line/moving average cross that indicates a new trend is starting. The signal line is about to meet the Klinger line on the daily chart, which indicates a trend formation is coming. Wait until the blue lines moves above the green line to open a long trade or until the blue line moves below the green line to open a short trade.
The ROC indicator is aligned with the two indicators on the long-term chart, showing that Bitcoin is in extreme oversold levels and is reversing to the upside. However, further verification is needed and a trader should wait patiently until the direction is confirmed.
The Rate of Change indicator does not have to be a trading indicator – it can be used as a calculator for people who want to compare its historic price performance. For example, if we want to analyze if Bitcoin is in a bearish year we can adjust the n values on the settings and compare it to previous years. The user-defined period can give us insight about any desired period.
Similar to trend oscillators, the ROC indicator can be positive or negative. Most traders who use the indicator base their trades on the reversals and breakouts near the zero line. The indicator is useful for long-term trading combined with other oscillators because it provides context to confirm trading bias. Traders who place risky leverage trades can calculate potential profits and observe patterns to help them make smarter trades.