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Trend Following with Rate of Change

The electronic contracts market sets itself apart from other financial exchanges due to one significant difference: the price of an asset need not change by a large amount for traders to profit – even a small change can be enough if the trader correctly predicts its direction.

As a result, oscillators are highly valued in the binary options market. These instruments are incredibly sensitive to price changes, allowing them to not only indicate the current direction but also the probability of a reversal.

Furthermore, an essential requirement for any electronic contracts market advisor is the complete absence, or at the very least, minimal delay of signals. Transactions in binary options typically have a short lifespan of one to five minutes, and a delayed signal can cost traders dearly.

Given these considerations, the Rate of Change oscillator is widely regarded as one of the best options available. It can generate confirmation signals quickly and without delay when used correctly, and is even available by default on several trading platforms, such as IQ Option.

How to set up the Rate of Change?

The Rate of Change oscillator is a popular technical analysis tool that measures the momentum of price changes. It calculates the percentage difference between the current price and a past price, allowing traders to identify potential trends and momentum shifts.

As an oscillator, the Rate of Change indicator is typically situated beneath the price chart. It appears as a line that oscillates above and below the 100 mark (or 0 in some platforms), providing traders with a visual representation of momentum shifts.

At its core, the Rate of Change indicator provides valuable insight into the market’s sentiment and the pace of price fluctuations by measuring deviations from a certain level. A major advantage of this indicator is its formula, which calculates the average value between the current price indicator and the previous closing price, eliminating any possibility of delay.

The signal line of the Rate of Change oscillator is plotted over a defined timeframe. For timeframes of up to 4 hours, developers recommend using values between 9 and 13, while for long-term trading, values between 15 and 20 are often employed. By utilizing the appropriate period settings, traders can gain a better understanding of momentum shifts and identify potential trading opportunities. Here are some rules that traders should consider when using the Rate of Change indicator:

  1. This indicator is ineffective in a flat market.
  2. It should not be utilized to enter a trade during a correction, only in the direction of the prevailing trend.
  3. It is not recommended to use the Rate of Change indicator during the release of critical news. It may react to every price fluctuation, including false ones, during periods of market volatility.
  4. It is important to confirm the signals provided by the Rate of Change indicator with other technical analysis tools, such as trend lines, support and resistance levels, or other oscillators. This helps to increase the accuracy of the trading signals and reduce the risk of false signals.

How to trade with the Rate of Change

While some traders may rely on the Rate of Change indicator as their primary signal, it is advisable to utilize it in combination with a trend-following tool such as a moving average. By confirming the oscillator signal with the trend-following indicator, traders can increase their confidence in the trading signal and potentially enhance their trading success.

Buy a CALL contract when the price is above the moving average and the Rate of Change signal line crosses above the 100 level.

Conversely, buy a PUT contract when the price is below the moving average and the Rate of Change signal line crosses below the 100 level.

Like many other oscillators, the Rate of Change indicator is useful for identifying divergences in the market. By comparing the direction of the oscillator signal with the price trend, traders can identify potential trend reversals and adjust their trading strategies accordingly.

Set the expiration to at least the time of formation of 2 bars.

By following this rule, traders can ensure that they are giving the market enough time to move in their anticipated direction before the contract expires.

While this approach can potentially lead to consistent profits, it is important to remember that no indicator can guarantee a 100% success rate. Therefore, traders should not overlook the importance of sound money management practices to manage their risk and optimize their profitability over the long term.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.


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