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Registered User
Joined: 1/5/2005
Posts: 3
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Hello guys,
Will you please explain to me how I can use the price rate of change in my chart analysis. I know the definition of price rate of change but not sure how to look for positive and negative divergences between the price ROC indicator and price. Thanks for your help.
Best regards,
Beshad
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Worden Trainer
Joined: 10/1/2004
Posts: 18,819
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Beshad,
Indicator lessons are beyond our restrictions as Trainers. I will move this to the Analysis forum and you should get some help from fellow chart technicians.
- Craig
Here to Help!
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Worden Trainer
Joined: 10/1/2004
Posts: 4,308
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Beshad:
Keeping in mind the limitations we trainers have concerning indicator interpretation (which is what Craig's point was in the previous post), I will point out that a divergence is simply when an indicator is doing something different than price.
If an indicator seems to move in tandem with price, then it is simply confirming the price movement. However, if during a particular period of time you see that an indicator moves in one direction, and price moves in another, then you have a divergence. The divergence is named based on the direction of the indicator. If the indicator is moving up and price isn't, this is a positive divergence. If the indicator is moving down, and price isn't, that is a negative divergence.
This concept holds true no matter what indicator you're dealing with.
To gain an understanding of what a positive or negative divergence tells you, relative to the Price Rate of Change.....well, that's why Craig moved the post to the Stock and Market Talk forum, so other technicians might shed some light on this for you.
- Doug
Teaching Online!
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Worden Trainer
Joined: 10/1/2004
Posts: 18,819
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...to add to Doug's comments:
If I am studying an indicator that I am unfamiliar with, I start by trying to understand what it is measuring. Every indicator is a formula that includes either a function of price, volume or both. I ask myself, "What is this formula trying to reveal or uncover?" What makes the indicator go up? What makes it fall? When it moves, what is happening to the price and or volume? What does this mean?
Here is the write-up on PROC from the help file:
"This is a momentum oscillator calculated from the price of an individual stock or a market index. A rate of change oscillator measures changes in percentage rather than actual points. The latest plot is calculated as the ratio of the current closing price to the price a certain number of periods ago. For example, if you apply a 10-day rate of change to the price of a particular stock, the oscillator is calculated by simply dividing the current day's closing price by the closing price ten days ago. It is also important to look for positive and negative divergences between the ROC indicator and price. This is also true of other oscillators, such as TSV, RSI and Stochastics."
Looking at this here is what I gather...
1. It is a ratio of where price is now as compared to where it was.
2. If price now is higher than it was, the ratio is greater than if the price now was closer to (or below) where price was.
3. Assume the price is rising. If the price, during the uptrend, gains more steam and increases its relative distance from the price levels of the past the indicator will go up. If price goes up but slows in the pitch of the uptrend, the indicator will fall.
4. The indicator MAY give me a sense of when the momentum of a trend is increasing or decreasing.
Of course, 1-4 are just my thoughts based on what was said in the help file. Now I would go and look at charts with the indicator plotted. I would focus on how the indicator behaved as tops and bottoms formed in the past. When tops or bottoms are forming does the indicator look or act a certain way? Do I see this consistently enough to have confidence in the indicator? Do I have enough confidence in the indicator (and my ability to read it) that when it acts this way again I can take action based on the pattern?
I know there is nothing magical about the indicator. It does not know what will happen to the stock tomorrow anymore than I do. What I hope is the indicator will help reveal some strength or weakness in the stock that I cannot immediately spot myself. Ultimately, I will be the one that makes the decision about the future of the stock. I will be the one that risks my capital based on my analysis.
- Craig
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Registered User
Joined: 1/5/2005
Posts: 3
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Thanks guys for shedding some light on this issue. Please keep me posted if other ideas(suggestions) come to your minds regarding price ROC. Thanks again.
Beshad
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Registered User
Joined: 1/3/2005
Posts: 28
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The instructors told you a little about price ROC, and I'd like to add my two cent's worth. There is a good book, by Jake Bernstein, on Price Rate Of Change: Momentum Stock Selection. He defines Momentum as the difference between today's closing price and the closing price 28 days ago. This is the same as the definition of ROC in TC200x; thus for an in=depth discussion of PROC=Momentum, read Bernstein's book. However, I only use the ten-day moving average of ROC and the thirty-day moving average of ROC. To do this, I first ask TC200x to plot ROC in the middle chart window, but not to display it. Then I ask TC200x to plot the ten day moving average of ROC in the middle display window, using a red line and to plot the thirty day moving average of ROC in the same chart window using a green line. Note: There is no comparable PCF for use with Easy Scans to do this so without laboriously building a a PCF for doing so, you can not use a moving average of PROC for stock slelction via an Easy Scan.
I interpret the plots of 10-day and 30-day moving averages in the following manner: If the red line crosses upward through the green line, the associated stock closing prices are upwards bound and the converse for a downward crossing. If the red line stays below the green line the stock is becoming bearish; the converse for stocks with the red line above the gfreen line. For more info, read Bernstein's book. Good hunting!!
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Worden Trainer
Joined: 10/1/2004
Posts: 18,819
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Thanks for your thoughts, DETOVREA. Sharing ideas like yours are what this forum is all about. Though writing a PCF/Scan for two averages of PROC would be tedious, visually sorting for it is quick and easy. CLICK HERE for a great video on Visual Difference sorting. You can do a Visual Difference Sort on any two indicators including two moving averages of PROC.
- Craig
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Registered User
Joined: 1/1/2005
Posts: 2,645
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DETOVREA is correct. PROC (also ROC) is not calculated as a ratio as stated in "Help Topics". It is calculated as a difference. This is easily verified by placing PROC in the Top Window and reading its value.
With this knowledge, writing PCF/Scan involving two averages of PROC becomes quit trivial.
Thanks,
Jim Murphy
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Worden Trainer
Joined: 10/1/2004
Posts: 18,819
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PROC is the difference of price now to where it was before (not division). The wording in the help file is poor and should will be corrected.
- Craig
Here to Help!
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