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About Momentum (Price ROC)
The price ROC and the momentum indicators are similar oscillators and are interpreted in the same way since they both measure how fast prices change. They measure the velocity of price changes by measuring price difference and plotting this below the price chart.
The only difference between the two indicators is that the ROC displays the rate of change in price as a percentage, whereas the momentum indicator displays the rate of change as a ratio.
Constructing the Momentum Indicator
Momentum is measured by calculating price difference for a fixed period of time.
The formula used is the following:
M = V – Vn
V = Last Closing Price
Vn = Closing Price n Days Ago
For example, find the difference between the current closing price and the closing price of 10 days ago. Plot this value. The value is either positive or negative. If positive it is plotted above the zero line and means that the closing price is higher than that of 10 days ago, which is an indication that prices are moving higher.
On the other hand, a negative value means that prices are below the zero line and are lower than the close 10 days ago.
If the momentum is horizontal, this means that prices are only rising at the same rate they were rising 10 days ago (so no change, no acceleration).
Look at the chart. If momentum is above the zero line, the prices are higher than 10 days ago. If momentum is rising, that means prices are going up, and are accelerating. A crossing above the zero line is a buy signal (the price trend must be up). A sell signal occurs when momentum crosses below the zero line (trend must be down).
When momentum starts to turn down, even though the price on the chart is rising, we see a slowing down in momentum, in the trend. So the trend could be turning. That is why we can say that momentum leads the price action.
Extremes
You should know by all means that momentum does not have boundary extremes and it does not have a line indicating at which point the momentum indicator is at an extreme, you just have to eyeball it.
Constructing the Price ROC Indicator
As mentioned before, the price ROC indicator is similar to the Momentum indicator since it measures the change in price. The difference is that the ROC measures the rate of change as a percentage.
Rate of Change = 100 (v/ Vn)
V = Last Closing Price
Vn = Closing Price n Days Ago
The mid-point line in this case is the 100 line (instead of a zero line) but the same concept is used. When the current price is higher than 10 days ago, prices are rising so the ROC will be above 100.
