Greetings to everyone,
It is pleasure to have this opportunity to learn from professor @kouba and i must say what a great lecture it has been all this while.
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I am by this post submitting my homework for the task given on the recent Rate of Change Indicator lecture. Thank you.
1. In your own words, give an explanation of the ROC indicator with an example of how to calculate its value?And comment on the result obtained.
The rate of change indicator just like the name suggests informs the traders of the percentage of an asset in terms of price within a given time frame. This means that with the ROC indicator we can easily obtain the percentage change in price from a certain time to the current market price.
The indicator when added to a trader's chart can be seen as a line oscillating along the value 0 which serves as the mid point. For a trader who is familiar or understands the principle of the indicator, he or she can use it to confirm trends, trade divergence and obtain trade signals using overbought and oversold zones for trend traders.
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Trend confirmations as quite easy to capture since line moves along the direction of the market however to obtain overbought and oversold signals one would have to look for a spread of 3-4% in excess. With the midpoint value 0 as a guide one can detect when market momentum is bullish or bearish.
Understanding the calculation behind the indicator
Prof made his students understand that understanding the formula behind an indicator is critical to long term success and so i made the effort to get down.
The simple formula behind the ROC indicator is the fraction of the difference between the current price of the asset and the price of the asset at a specific period back and the product of the price of the asset at a specific period back and 100.
Mathematically we have: ( C – Pn)/ ( Pn) x 100
Where C= Current Market Closing Price For our example we will use BTCUSD chart with a period of 25; Lets take C=$62402 and Pn = $62000 This will give us ROC= ( 62402– 62000)/ ( 62000 ) x 100 = (402)/ ( 62000) x 100 = (0.0064) x 100 =0.64% For this demonstration i would be using the BTCUSD chart on trading view. Do note that the recommend period for ROC is between 12 to 25 with 25 been for the long term trader and 12 for the short term trader. It is however always advisable to backtest any indicator or strategy per your already existing strategy to see if it works for you. We have already come to understand that the ROC indicator works using the percentage change in asset. As may be seen in the images, the indicator appears as an oscillating line around the midpoint value zero with which a trader may confirm or trade a signal etc. For a bullish trend it would be observed that the line moves above the 0 midpoint and would stay above the point as a confirmation of the trend's continuation. The line sharply moving above the 0 point tells us that there is strong bullish momentum. Same thing goes for the bearish trend where the line or oscillation would be observed below the 0 midpoint and would continue to stay that there as a confirmation of the trend. A sharp movement below the 0 point tells the trader that there is a strong bearish momentum. In a trend the ROC indicator can be used to identify overbought and oversold zones much like retracement areas to give signals of buy or sell for the trader to ride the trend. With the understanding of the movement of the indicator along the zero midpoint too and the momentum of bearish and bullish movements a buy or sell signal may also be taken. And so basically a movement above the 0 line can serve as a buy signal whereas a movement below the 0 line serve as a sell signal. For overbought zones a spread difference of +/- 3 or 4 is normally considered by most traders thus these zones can be marked on your chart within the indicator window as i have done. Basically in oversold we get the idea that bearish momentum is exhausted or getting exhausted and so we look for more buying opportunities, In overbought zones bullish momentum is getting exhausted and so we look for selling opportunities. For my chart i used the spread of 3 as my overbought and sold zones. You are however recommended to always backtest and see which works best for you per the market you trade and your strategy. Divergence trading has to do with your indicator moving in a direction opposite that of your chart. Most often when this happens it is to tell the trader that a change may be coming and depending on the indicator been used it can be interpreted as momentum change etc. In bullish divergence market moves down whereas the indicator moves up telling the trader of a possible move to the upside. This give the trader the opportunity to enter the market in anticipation or wait for market movement to join. In bearish divergence market moves up whereas indicator moves down telling the trader of a possible move to the downside. This gives the trader the opportunity to enter the market in anticipation or wait for market movement to join. Considering the fact that no indicator is the gold standard or perfect indicator there would definitely be times where this would not work hence the need for a trader to always have more than one tool to rely on for taking a trade. Confluence trading is always advised. Breakouts come about after market has been consolidating for a while. This is also called ranging or a ranging market. Ranging markets have supports and resistances along which price keeps bouncing to the opposite side. When price finally breaks either the support or resistance we have a breakout. The aggressive trader may trade with the breakout whereas the conservative trader will wait for trend establishment. The ROC indicator can be used to confirm a trend breakout by observing the sharp movement that comes along with the breakout moving it away from the midpoint 0 in a particular direction. In my illustration there was a bearish breakout after market consolidate and this can be seen both on the chart and on the indicator. For this illustration i used the ADA/USD chart on trading view for the my bullish signal i looked for a sharp movement away from the zero line upwards signaling a strong bullish momentum which i confirm with the 20 EMA coming below the chart or candlesticks. A long position with a reward ratio of 1:4.53 per my stop loss would have given us a good profit. Another opportunity was spotted after a sharp movement down below the 0 margin giving us an indication of a strong bearish momentum. This is further confirmed with the EMAs 20 and 50, our sell is placed after the retracement our stop loss at the previous high and take profit at the next support with a risk to reward ratio of 1:3 which is quite good. The ROC indicator as a momentum indicator can be a great asset to traders when the principle behind it is understood and it's strategies tested. It can be used for divergence trading, overbought and oversold trading, confirmation of trend and trading along the trend. The observation is best set between 12 and 25 wit 12 been for the short term and 25 for the long term. It is however advised that traders always backtest the indicator along with their strategies for best results and always resort to more than one indicator (confluence trading) for your trading activities. It has been an amazing lecture once again and i am grateful for the opportunity presented by @kouba01. Thanks for your time
Pn= Previous Market Closing Price at a specific time
2. Demonstrate how to add the indicator to the chart on a platform other than the tradingview, highlighting how to modify the settings of the period(best setting).(screenshot required)
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3. What is the ROC trend confirmation strategy? And what are the signals that detect a trend reversal? (Screenshot required)
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4. What is the indicator’s role in determining buy and sell decisions and identifying signals of overbought and oversold (screenshot required)
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5. How to trade with divergence between the ROC and the price line? Does this trading strategy produce false signals?(screenshot required)
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6. How to Identify and Confirm Breakouts using ROC indicator?(screenshot required)
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7. Review the chart of any crypto pair and present the various signals giving by ROC trading strategy. (Screenshot required)
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Conclusion
Hello @nattybongo,
Thank you for participating in the 8th Week Crypto Course in its 4th season and for your efforts to complete the suggested tasks, you deserve a Total|7.5/10 rating, according to the following scale:
My review :
A good article in which you were able to answer most of the questions ably, and you have some notes that I made.
A acceptable explanation of the ROC indicator and how to calculate its value. It was possible to use a graph so that the result and your conclusion is closer to reality.
As for the third question, in its second half, you did not go into depth in determining how to reverse the trend using the indicator.
In the last question it was possible to extract several other signals.
Thanks again for your effort, and we look forward to reading your next work.
Sincerely,@kouba01
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Thanks Prof
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