Crypto Trading With Rate of Change (RoC) Indicator - Crypto Academy / S4W8 - Homework Post for @kouba01

This is my homework post for Steemit Crypto Academy Season 4 Week 8 of Professor @kouba01’s class Crypto Trading With Rate of Change (RoC) Indicator.

1.1. RoC Indicator Is …

Rate of Change (RoC) is a trading technical analysis tool, which is grouped in to the momentum indicators of the oscillator type. This tool compares price movements between certain “moments”. In using this indicator, users need to set a time span (period) for calculating the RoC value. For example, a user sets a period of 20 days, then the indicator will measure price changes that occur on a certain day compared to the price of 20 days before, and show the result in percentage. The RoC value can be negative or positive. Negative and positive values are separated by a horizontal zero line.

Users can set to use the Price type they prefer, it might be Close, High, Low, or any combination they’d like.

1.2. The ROC Indicator Value Calculation Example

1.2.1. The Formula

The theoretical description above can be refined into the formula:

^{The formula to calculate RoC value.}

Where:

• Price_(x) = Price on a certain day.
• Price_(x-n) = Price on a certain day of n-period back.

1.2.2. Calculation Simulation

How to put it into practice, for example: a user set RoC for a 13 days period. They want to see Rate of Change on the 27^th. The RoC of that day was in correlation with the price on the 14^th (13 days before the 27^th). Say, the data was:

• the price on the 27^th was 23.76
• the price on the 14^th was 31.84

The RoC value on the 27^th was:
RoC = ((Price on the 27^th - Price on the 14^th) / Price on the 14^th)) * 100%
RoC = ((23.76 - 31.84) / 31.84) * 100%
RoC = (-8.08 / 31.84) * 100%
RoC = -25.38%

The following is an example of a 20 days price data table and a 10-day RoC calculation.

^{Example table of data and a 10-day RoC calculation.}

The graph for the data looks like this

^{The graph of the 10-day RoC calculation of the data given above.}

Now let’s put the same data on a 7-day period RoC. Here comes the table.

^{The table of same data in the 7-day period RoC.}

And here is the graph.

^{The graph of the 7-day RoC calculation of the data given above.}

1.3. My Comment on The Result

As a momentum indicator, RoC tracks and calculates the data based on the “moment” (lookback period) given. The value should always be taken in correlation with certain days back. Different RoC value will be shown on a certain day when observed with different lookback period. Some might give a strict different value (between negative and positive). For example, on the example data above, the 11^th and 15^th day, the 10-day RoC values for both days were negative (-0.20% and -2.13% respectively), while the 7-day RoC shows positive values (1.10% and 1.43% respectively).

^{The comparison table of 7-day and 10-day RoC.
The comparison graph of 7-day and 10-day RoC.}

So, RoC is totally related to the lookback period set by the users. How a user find a suitable setting for his trade might be subject to experience.

2.1. Adding RoC Indicator on to A non-TradingView Chart

For this task I used ADA/USD chart from stockcharts.com on daily timeframe.

^{Daily tiemeframe price chart of ADA/USD pair from stockcharts.com.}

2.2. Setting Up the RoC Indicator on the Chart

On the left pane of the window, I used the Add Indicator search box to easily search for Rate of Change (marker number (1)). I hit the relevant one from the result list (which was only one related to keyword “rate”) (marker number (2)).

^{Searching for indicator to add to the chart.}

RoC indicator showed under the price chart, as indicated by marker number (1) on the picture below. The left pane (indicated by marker number (2)), changed to the indicator editing mode. Marker number (3) indicated the panel to change timeframe, chart type (line, candlesticks, etc.), and time range. The marker number (4) showed the site indicator default setting (which was 12-day) and value (1%).

^{The RoC indicator was added to the chart.}

I made change to the indicator parameter setting by changing the period to 14-day simply by typing it in (indicated by marker number (1) on the picture below). I left the price source as its default setting (Close), as indicated by marker number (2). The period changing caused the RoC value change as indicated by marker number (3), it changed to -2.00%.

^{The RoC parameter setting and its effect.}

Users can choose the preferred calculation source as shown on the picture below. It can be Close, or High, Low, average of High and Low ((H+L)/2), and so on.

^{The calculation bases to choose.}

Below is the zoomed image of the chart, shows the condition for the last 3 weeks.

^{The daily-timeframed ADA/USD chart with 14-day RoC Indicator on 3 weeks timespan.}

2.3. The Best Setting

On the above task, I performed the period changing from 12-day to 14-day. By that, the RoC value changed from 1.00% to -2.00%. It does not indicate whether one of the two settings is better than the other. Users can use one of the two settings, or can even observe both and make comparisons, or even use completely different period settings, for example 7-day or 6-day and so on.

In my opinion, the best RoC settings depend on users’ needs. Longer periods may be more suitable for longer term trading, for example 14-day RoC is more suitable for longer term trading than of 7-day RoC.

Let’s take the above example of comparison graph for a study.

^{The comparison graph of 7-day and 10-day RoC.}

The graph above shows that although there was a difference in the value of RoC between the two periods, the trend line was the same. It was probably because the period difference was only 2 days. To gain better perspective, I experimented by generating a 3-day RoC from the same data and by that a comparison chart as shown in the following image.

^{The 3-day, 7-day and 10-day RoC comparison graph.}

The three RoC lines on the picture above show the same trend since the 11^th, downtrend. Meanwhile, 3-day RoC and 7-day RoC produce different conclusions if the observations are made from the 8^th. According to the 3-day RoC, from the 8^th to the 20^th, there was a downtrend, while for the same time span, the 7-day RoC shows an uptrend.

Meanwhile, for the time span between the 18th and the 20th, the 3-day and 10-day RoC shows a downtrend, in contrast to the line generated by the 7-day RoC. However, all three lines are below the zero line, starting with the 3-day RoC line crossed the zero line on the 17^th and two more RoCs followed the next day.

So, in my opinion, every trader can determine the setting that they think is best for their trades, and that is closely related to the type of trading they are doing (shorter term or longer term), although various sources say that RoC is more suitable for long term trading. Even two charting platforms (for example) TradingView and StockChart, give different default values for RoC. TradingView’s default value for RoC is 9 (9-day) while StockChart’s is 12-day.

I haven't found through research on the internet any references that explain a definite correlation between the RoC period and the exact trading activity.

3.1. What Is RoC Trend Confirmation Strategy?

RoC, like another oscillator type indicators (to name one: Williams Percent Range), is effective in helping users identify trends early by generating some signals (overbought and oversold). But to effectively confirms whether a trend will perform continuation or a reversal will occur, a combination with other technical indicators is needed. Everyone may have a certain type of technical analysis indicator that they prefer to combine with RoC, in turn to getting a “stronger belief” on a signal. I myself found that Double EMA (DEMA) suits my need on this matter.

^{The chart is observed under the combination of RoC and Double EMA.}

The picture above shows how Double EMA effectively confirmed trend reversal. It might take some times after RoC signaling a trend reversal possibility, but it is worth to wait to get confirmed, since DEMA is also effective to confirm false signals.

3.2. The Signals That Detect A Trend Reversal

In RoC indicator, trend reversal signals are detected when the RoC line crosses the zero line. When it crosses the zero line from positive area (above zero line) to negative area (below zero line), the trend reversal from bullish to bearish is likely to happen soon, and vise versa. See the picture below for example.

^{Detecting trend reversal signals.}

The picture above shows that the crossing of the zero line from the negative area by the RoC line (marked number (01)) was followed by a change in the trend towards bullish. And the zero line cuts from the positive area (marked number (03)), followed by a change in the trend towards bearish. While the marker number (2) and marker number (4) confirms the theory that if the price continues to increase then the RoC line remains above the zero line, and if the price continues to decline, the RoC line will remain below the zero line.

4.1. Buy and Sell Positions

Basically, a buy position is made when the RoC line crosses the zero line from the negative area to the positive area. And the sell position is made when the zero line is crossed from the positive to the negative direction.

^{Deciding Buy and Sell position using RoC.}

4.2. Overbought and Oversold Signals

RoC is an oscillator that differs from other oscillators in term that RoC does not have a value range (lowest and highest values). This causes the setting of overbought and oversold values to be a bit difficult. The recommended way to determine overbought and oversold in RoC is by observing the price history.

4.2.1. Oversold

The picture below shows that the historical oversold values (marked number (1) and number (2)) for ADA/USD was between -45% to -50%, and marker number (3) confirms that it was effective to put the oversold value on that area.

^{Determining oversold level on RoC.}

4.2.2. Overbought

By observing the historical overbought of this asset (ADA/USD), as indicated by the markers number (1), (2) and (3) in the picture below, I concluded that overbought is effective to be placed at 50%. It’s proven when the RoC line then hits overbought again (at markers (4) and (5)), trend continuation occurs.

^{Determining overbought level on RoC.}

5.1. Bearish Divergence

Bearish Divergence happens when the price line shows uptrend while the RoC line shows the downtrend. As name implies, this divergence leads to bearish market.

^{The bearish divergence, bad signal.}

5.2. Bullish Divergence

Bullish Divergence is the opposite of the bearish one. It happens when RoC line shows uptrend while price line moves as a downtrend. It basically is a good signal that leads to bullish market.

^{Here comes the bullish market that follows the bullish divergence.}

5.3. False Signals

But, be aware enough, False Signals may occurs at any time. When bullish and bearish divergences put the RoC line “in charge”, it works the other way around with false signals. On divergences false signals, rather than following the RoC trend, the upcoming trend follows the current price line trend. In the example below, the RoC line shows uptrend and price line goes on a downtrend, base on the theory it should be a “good sign” bullish divergence, but the picture shows that the price line does not follow that rule.

^{A false signal of a divergence, be aware.}

And that’s why a confirmation analysis tool would be a good, effective decision. Let’s combine the RoC with DEMA as seen on the picture below.

^{No crosses simply means no trend reversal.}

The picture above shows that DEMA was effective to alarming a trader that no trend reversal will follow the divergence.

6.1. Resistance Breakout

Resistance breakout occurs when the asset’s price moves above the resistance line. The picture below shows an example of the resistance breakout.

^{The price breaks the “top barrier”. An early sign of bullish market.}

The picture shows that the resistance breakout was preceded by the crossing of zero line from negative area. When RoC line stayed above the zero line, the breakout was soon confirmed. The resistance breakout leads to uptrend.

6.2. Support Breakout

Support breakout is the opposite to the resistance breakout. It is when the price moves below the support line. Below is the example of the support breakout.

^{The price breaks the “lower barrier”. An early sign of bearish market.}

The picture shows that the support breakout was preceded by RoC line crossed the zero line from positive area (above). And when the RoC line stayed below the aero line for some times, the breakout was confirmed.

7.1. The ROC Indicator on A Crypto Pair Chart

For this task I used the Solana/USD (SOL/USD) daily chart from StockChart as seen here. The RoC was calculated from Close price.

^{The SOL/USD Daily price chartas seen on StockChart.}

7.2. Observed Signals Given by ROC Indicator

The The SOL/USD daily price chart I was able to detect various signals generated by RoC as follow:

• Bullish. Bullish signals are taken when RoC crosses zero line from below (negative area). It is confirmed a bullish market when RoC stays above the zero line.
  ^{Bullish signal.}
• Bearish. When RoC crosses zero line from above (positive area), it is basically an early sign of a bearish market. It is confirmed a bearish market when RoC stays below the zero line for some times.
  ^{Bearish signal.}
• Bearish Divergence. If the chart shows that price is moving up while the RoC shows that it’s moving to opposite direction, then likely a bearish market is imminent.
  ^{Bearish Divergence.}
• False Divergence. Divergence happens when price chart shows different trend from what RoC shows, and the trend that follows is the trend suggested by the RoC. But when the different trend shown by RoC and price chart, and the following trend was one suggested by price chart, it is considered a false divergence. Below is the example of false divergence when that shows how price trend ignores the trend suggested by RoC.
  ^{False divergence.}
  If the RoC was combined with another tool, it might be confirmed earlier before a trader make a wrong move. Let’s see if the chart was observed with the help of Double EMA as shown below.
  ^{DEMA helps traders ignores the false divergence signal.}
• Support Breakout. It happens when price “break” the “lower barrier” (support line). Example is shown below.
  ^{Support has been broken.}
• Resistance Breakout. It happens when price breaks the “upper barrier” (resistance line) and moves above it. Here is an example.
  ^{Resistance has been broken.}

RoC as momentum indicator that can be used by traders to get a better picture and understanding of what is going on in the market. It is of oscillator type indicators, but without value range.

Pros

• Bearish and bullish signals. This oscillator type indicator works by detecting bearish and bullish signals, simply by showing the crossing of zero line by RoC line.
• Divergences. One of the advantages of RoC is that because this indicator is an oscillator type, it can be used to detect divergences. Divergences are always effective for reporting trend reversals. But no indicator is perfect, RoC can also generate false divergence signals.
• Oversold and Overbought Levels. These levels work and function the same with William Percent Range’s oversold and overbought levels, to generate early signal of new trend. Differs from Williams Percent Range in which these levels can be set in the indicator parameter setting, the RoC does not have the setting for overbought and oversold levels. Traders have to do it manually by observing the historical overbought and oversold level.
• Breakouts. Traders can expect breakouts to appear after seeing bearish and bullish signals (when the RoC crosses the zero line). If the RoC stays in the new area for some time, it is likely that a breakout will occur.

Cons

• False Signals. Just like other indicators, not perfect, so is RoC. This indicator can be used to get an early prediction of what will happen in the market, but false signals can also appear at any time.

Suggestion
It is highly recommended to use RoC with the help of other technical indicators that are considered suitable by each trader. This is to help traders confirm the signals generated by the RoC and vice versa.

Thanks

Thanks Professor @kouba01 for the lesson titled Crypto Trading With Rate Of Change (ROC) Indicator.

Pictures Sourcing

• The editorial picture was created by me.
• Unless otherwise stated, all another pictures were screenshoots and were edited with Photoshop CS 3.

Sources and Reading Suggestion

• https://steemit.com/hive-108451/@kouba01/crypto-academy-season-4-advanced-course-week-8-crypto-trading-with-rate-of-change-roc-indicator;
• https://www.investopedia.com/terms/p/pricerateofchange.asp;
• https://www.tradingview.com/scripts/rateofchange/;
• https://www.fidelity.com/learning-center/trading-investing/technical-analysis/technical-indicator-guide/roc;
• https://www.tradingtechnologies.com/xtrader-help/x-study/technical-indicator-definitions/rate-of-change-roc/;
• https://school.stockcharts.com/doku.php?id=technical_indicators:rate_of_change_roc_and_momentum;
• https://www.elearnmarkets.com/blog/rate-of-change/;
• https://www.inbizia.com/apa-itu-breakout-trading-489;
• https://findependence.org/how-to-profit-from-a-breakout/;
• https://www.investopedia.com/articles/trading/08/trading-breakouts.asp;
• https://www.investopedia.com/articles/trading/08/trading-breakouts.asp;
• https://www.investopedia.com/articles/trading/10/3-reasons-not-to-trade-range-breakouts.asp;
• https://www.thebalance.com/three-better-ways-to-day-trade-breakouts-1030880;
• https://www.seputarforex.com/artikel/penjelasan-tentang-strategi-breakout-121009-31;

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