PRINT THIS ARTICLE
RATE CHANGE - PRICE
Rate Of Change09/30/09 09:00:03 AM
by Mike Carr, CMT
This indicator is rarely used but can provide valuable insights.
|Most traders fail to examine what the indicator known as the rate of change really is, which is simply the percentage change in price over a defined period. For example, to calculate the 26-week rate of change, you would subtract the price 26 weeks ago from today's price and then divide that difference by the price 26 weeks ago.|
|One problem with it is that it just seems to be too simplistic to provide trading signals, and this is true. But it can be combined with a moving average and applied to trading strategies as a trend filter. This idea is shown in Figure 1.|
|FIGURE 1: COPPER. Here's copper with the 26-week rate of change and a 34-week moving average.|
|Graphic provided by: Trade Navigator.|
|In this figure, the rate of change in price is trading above its long-term moving average. A 34-week moving average is used, but there is nothing magical about that number. Waiting for the crossover to initiate a long position allows the trader to capture almost half of the move off the bottom.|
|Applying a moving average to an indicator is an overlooked technique, yet it is actually the basis of the well-known and widely followed stochastic indicator. In this case, the technique can serve as a trading signal or a trend filter as part of a more complex strategy.|
Mike Carr, CMT
Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."
here for more information about our publications!
PRINT THIS ARTICLE