A few days ago I introduced you to some basic concepts for trading with the ROC (Rate of Change) indicator, as I told you then, this is a type of momentum oscillator that represents the percentage changes that the price of a cryptocurrency undergoes, showing the rate of change of the price in a certain period.
Edited image, original from pixabay.com.
Graphically we observe this indicator as a line that moves above and below zero, being a representation of the price trend and its strength.
Therefore it is very simple to use this indicator, we only need to look at how it behaves with respect to the central line. If the indicator line moves above the central line, it indicates an uptrend in the market; on the contrary, if it moves below the central line, it means that the market trend is bearish.
How to use the ROC indicator in trading?
From the above we can deduce how to use it to detect buy and sell signals.
Buy signal
As mentioned in the previous answer, our signal to place a buy order is when the indicator line crosses above the zero level, moving from the bottom to the top, and prices follow this trend, as this signals us that the buying pressure is giving a bullish momentum to the price.
We can then place our buy order a little above the zero level crossing to get confirmation, and we will watch for when the indicator starts to fall to the center line, which will indicate that the uptrend is running out of steam.
Sell signal
Similarly we can consider a signal to place a sell order when the indicator line crosses the zero level moving up and down and prices begin to decline, signaling the beginning of a downtrend.
Example of a buy signal. Screenshot taken from Investing.com.
How to trade divergences?
As with other indicators, a divergence with the price line and the ROC can signal that the current trend is losing strength and is about to reverse, which is very useful for detecting buy and sell signals.
Bullish divergence
This occurs when prices move lower but the ROC indicator line marks higher lows, which means that buyers are gaining strength and will take control of the market.
In the following image we can see a divergent movement between the price and the indicator, in this case we can place a buy order when the indicator line exceeds the zero level and prices confirm by breaking the trend line, and for safety we can place a Stop Loss a little below the nearest low.
Screenshot taken from Investing.com.
Bearish divergence
This occurs when the price line follows an uptrend but the ROC indicator registers an opposite trend, this is a sign that the buying pressure loses strength and the bearish will take control of the market.
In the following image we can see that in the indicated region the price follows an uptrend but the indicator moves in the opposite way, to trade in this case we can place a sell order when the indicator line passes below the zero level and the fall of the prices confirms the downtrend.
Screenshot taken from Investing.com.
In conclusion, the movement of the indicator provides us with operational signals that are easy to interpret, and divergences are very interesting movements that also allow us to detect in advance a possible change of trend, but we must remember that no indicator by itself is infallible, and may present false signals, and cases in which divergences present a zero level crossing that is quickly corrected, which may lead us to place an order in advance; therefore it is essential to have a good risk management and support our decisions with other indicators.
Thanks for coming by to read friends, I hope you liked the information. See you next time.