The Rate of Change is an oscillator that displays the difference between the current price and the price x-time periods ago. As prices increase, the ROC rises and as prices fall, the ROC falls. The greater the change in prices, the greater the change in the ROC.
The 10-day ROC is an excellent short- to intermediate-term overbought/oversold indicator. The higher the ROC, the more overbought the security; when the ROC falls expect a rally. As with all overbought/over-sold indicators, watching for the market to start its correction before placing a trade. Often extremely overbought/oversold readings usually imply a continuation of the current trend and any overbought market may remain that way for some time.
A 10-day ROC tends to oscillate in a fairly regular cycle. Often, price changes can be anticipated by studying past cycles of the ROC and applying the predicted pattern to the current market.
To construct a 10 day rate of change oscillator, the latest closing price is divided by the close 10 days ago:
ROC = [ (Close-Close 10 periods ago) / (Close 10 periods ago) ] * 100