The Rate of Change indicator (ROC) is a simple momentum oscillator that measures the percentage of price change between two time intervals. The formula used to calculate the ROC connects the current price of a currency to the n previous periods. More precisely:
(Closing Price Today - Closing Price of "N" periods back) / Closing Price of "N" periods back.
Like almost all momentum indicators, the ROC is an oscillator centered at zero, and the signals of purchase and sale occur in association with:
- - Zero-crossing
- - Divergences
- - Overbought and oversold situations
The signals generated by the zero crossing are very sensitive to sudden peaks in price, however they are very useful in interpreting the general trend of a currency. Intuitively, when the ROC remains in the positive zone, the currency price continues its rise; on the contrary, when the ROC lies in the negative zone, the currency prices keeps on falling.
The strong fluctuations faced by currency crosses allow us to use some interesting trading strategies using the same Roc in conjunction with other indicators. The Roc allows us to capture the excesses of the market exploiting them in the opposite way, more than for the intraday trading operation.
Let’s take for example the recent trend of EUR / USD. Using the Roc at 52 weeks, in recent years it has always been possible to intercept the top and bottom of the primary market. For example, the bottom of 1.2045 in July 2012.
When the Roc at 52 weeks fell below the level of 13% we understood that the strength of the dollar would not go over that, because, the trend line that linked the bottom of 2005 and 2010 was passing on the same support. In fact EUR / USD has turned right on that support, following the similar behavior that it had in 2010; at this point too, there was Roc at 1 year at 13% and a precise bottom at 1.1880. The same behavior happened in 2008 and 2005 when the Roc fell below the threshold and a bottom was formalized after a few weeks. The same matter has been identified on the top. When EUR / USD grows more than 15% in 12 months, then the short on EUR / USD will hardly prove to be a wrong choice in the medium term.
Primary tops and lows with ROC
We can find the same value in the EUR / TRY change. In this case we have to calibrate the correct levels of Roc, but after this setting, the satisfaction for the trader will be considerable. As we can see from the chart, in the last 10 years it has been possible to anticipate or intercept the primary bottom of the cross using a Roc at 30 weeks. When the Roc at 30 weeks drops below -11% then the bottom is in the air, on the contrary, when EUR / TRY rises more than 20% in 30 weeks, then it is much better to prepare to go short. For example, in 2011 a Roc at 30 weeks over 20% has matched the test of the trend line that connected the highs of 2006 and 2009, an outstanding signal that anticipated the traders a possible retracement.
Primary tops and lows with ROC
Even for EUR / GBP the strategy of Roc, combined this time to the performance of the Rsi, has proved to be quite effective in intercepting the last decade primary bottoms. On a weekly scale, EUR / GBP should be bought when the 40 weeks variation falls below -7%, but this indication alone is not enough. The Roc must be associated to the Rsi in a strong oversold under 25. The (rare) combination of these two elements has allowed us to intercept the bottom of 2004, 2010, and probably also the one of 2012.
More articles you can find at http://www.buzzinforex.com
Komentarų nėra:
Rašyti komentarą