What is rate of change?

Investors looking to expand their knowledge on advanced technical analysis concepts might research "rate of change." But what is rate of change? At the most basic level, rate of change (ROC) is defined as the speed which a variable changes over time. The term is often used when discussing momentum, and in finance, it allows investors to track a security’s momentum or other trends.

How do you use rate of change in trading?

In advanced trading and investing strategies, ROC can be a useful concept to understand. Because ROC measures how a price changes from one period to the next (typically shown in percentages), many traders pay close attention to this metric when comparing the rate of change in the price of an option in relation to a change in the price of the underlying asset.

For example, ROC is often used as an indicator of divergence. If a stock's price is rising while the ROC is falling, then the ROC is signifying bearish divergence from price. This could possibly be signaling a trend change to the downside, which can be useful information for an investor who wants to try to take advantage of this while trading.

What is the rate of change in momentum?

ROC in momentum helps track a security’s value. A security with high momentum (positive ROC) normally increases in value. On the other hand, a security with low momentum (negative ROC) is likely to decline in value. These changes in momentum can be a signal to investors who are trying to take advantage and implement ROC into their trading strategy.

This is a concept that can be explored with a J.P. Morgan Wealth Management advisor. ROC is an advanced concept, and it is recommended that a professional help you execute this in your investing strategy.

How to calculate rate of change

ROC is the change in percentage of the closing price of today in comparison to a closing price “n” periods ago. To calculate it, use the following formula:

How to calculate the average rate of change

Average ROC shows how a rate may change on average over a set period. This can give you a more detailed look into how rates change over an average time period. To calculate average ROC, use the following formula:

You could use this formula to find out how much the price of a security changes on average every four hours, four days or four months.

How to calculate the instantaneous rate of change

On the contrary, instantaneous ROC shows the ROC at a particular point in time. To boil it down even simpler, think about when you're driving a car. Your speed changes often. When you speed up to pass another car, you could calculate the instantaneous ROC of your speed at this particular point in your journey in comparison to your speed the rest of the journey. To calculate it for financial uses, use the following formula:

Rate of change trading example

ROC can be used when trading to help an investor have more information about possible trends or indicators of a security. For example, if a stock's price at the close of trading today is $15, and the closing price five trading days prior was $9, then the five-day ROC is 66.67%, calculated as:

[(15 - 9) ÷ 9] × 100 = 66.67%

This allows an investor to see that over the last five days, the price has gone up by nearly 67%, which is information that can be useful when deciding how they may want to trade the stock.

Ready to invest?

Hopefully now, “What is rate of change?” is a question that you know the answer to. Using ROC can be helpful when trading, but it is also considered a more advanced concept of technical analysis, especially as you get into the deeper parts of it like average ROC and instantaneous ROC. Speaking with an advisor at J.P. Morgan could be a great way to make sure you’re making the most of ROC in your investment strategy.

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