Measuring breakouts with “ROC”:

Many believe it is important to view the market from as many different angles as possible. The market's day-to-day price action is the result of the perpetual battle between the buying and selling forces which enter the marketplace every day, driven by their own reasons or motivations. Because the human decision to buy or sell any given market is guided by emotional factors, mathematically it may be difficult at times to logically dissect the trading activity into a straight forward formula. For this reason, we must do our best to look at the same picture from as many different angles as possible.

The (ROC) Rate of Change indicator is a very straight forward momentum oscillator which measures the percent change in price, from one period to the next. With the center line set at either 0 or 100, the ROC can be used to identify range bound conditions as the market continues to move to a lesser degree each time it revisits a narrowing support and resistance line. However, when the market breaks out of its own respective trading range, the ROC will reflect this change in sentiment as it may break out of its own respective consolidation pattern. This reminds us of a crucial point: it is not only important to identify those times when the market trades at a new high or low price, but also to measure this move in respect to the market's “normal” trading habits.

For example, we can see the following (2) charts show a very common trade setup or situation; the market in both cases formed a common triangle consolidation pattern as its support and resistance lines continue to trend towards one another. This may take the form of a consolidation triangle pattern on a number of different time frames. Throughout the course of a trading day, there may be many times when traders will buy a new high or sell a new low in anticipation of a breakout in either direction. But we can see the true breakout did not occur until the ROC broke out of its own respective trading range. Logically we can see that when a breakout occurs, the market has a tendency to move to a greater degree than it did during the previous period(s) of time. As we can see from the chart above, the ROC plots this phenomenon in an easy to understand format. Additionally, we can continue to anticipate the market's trading range will persist until a new high/low occurs not only on the physical price chart, but also when reflected in our ROC.

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