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Chapter 3. Moving Averages and Rates of ... > The Rate of Change Indicator: How to...

The Rate of Change Indicator: How to Measure and Analyze the Momentum of the Stock Market

The Concept and Maintenance of the Rate of Change Indicator

Rate of change measurements measure momentum, which is the rate at which price changes are taking place. Consider a golf drive, for example. A well-hit ball leaves the tee quickly, rising and gaining altitude quickly. Momentum is very high. Although it might be difficult to estimate the carry of the drive in its initial rise from the tee, it is often possible to determine, from the initial rate of rise of the ball, that this is a well-hit drive, likely to carry for some considerable distance. Sooner or later, the rate of climb of the ball clearly diminishes and the ball loses momentum. At this time, an estimate of the final distance of the drive can be more readily made.

The important concept involved is that rates of rise diminish before declines actually get under way. The falling rate of change of the drive provides advance warning that the ball is soon going to fall to the ground.


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