Trading strategy // How to trade divergences between ROC indicator and price line

A bearish divergence between the ROC indicator and the price line of any financial instrument occurs when in an uptrend the ROC indicator reveals a consecutive projection of bearish points, a behavior that can be interpreted as a weakness of the uptrend and the beginning of a downtrend.

In the following chart I plotted a bearish divergence between the ROC and the price line of the ETH/USDT pair.

A bullish divergence between the ROC indicator and the price line of any financial instrument is when the ROC indicator reveals a consecutive projection of bullish points above the zero (0) line, while the price action presents a downward trend, behavior that can be interpreted as a weakness of the downtrend and the beginning of an uptrend.

In the following chart I plotted a bullish divergence between the ROC and the price line of the DREP/USDT pair.

As I have already mentioned, like the rest of the momentum indicators, the Rate of Change (ROC) indicator also generates divergences in opposition to the price action, however, the divergences between the ROC and the price line is not as reliable as those produced by other technical momentum indicators, being this one of the main limitations of the ROC indicator, because it gives the same weight to the most recent price and to the price of "n" periods ago, in spite of giving more importance to determine the future movement of the price, fact that in itself gives false signals in the projection of divergences, breakouts and also in reversal signals.

In the chart below, notice how the Rate of Change (ROC) indicator, after a prolonged sideways zone, generates a false breakout signal with respect to the price action in the SLP/USDT pair.

I hope that the material has served as guidance, and you can include some of the points discussed here in your trading strategies, if you have any concerns please leave your comments.

Cory Mitchell Price Rate Of Change Indicator (ROC). Link