How to Determine a Security Price’s Percentage Rate of Change - dummies

How to Determine a Security Price’s Percentage Rate of Change

One problem with the security price momentum indicator is that you miss a frame of reference — you don’t know whether the move is a huge change over a short period or a minor event hardly worth considering. To add context, you put the rate of change into percentage terms that everyone can understand.

Calculate percent rate of change:

  1. Take today’s close minus the close from a certain number of days ago.

    This calculation provides you with basic rate of change. You can use the close from any day in the past, but say you use ten days.

  2. Divide the difference from Step 1 by the close from that same number of days ago.

  3. Multiply the answer in Step 2 by 100.

    The resulting indicator looks virtually identical to the rate of change calculation that you can get by using subtraction alone, but the arithmetic process converts it to a percentage basis. If you use charting software, it puts numbers on the vertical axis of the chart denoting that a move is (say) 15 percent from ten days ago, or 30 percent from ten days ago.

The indicator can deliver a positive or negative number:

  • If the price is higher today than ten days before, the indicator delivers a positive number.

  • If the price is lower today than ten days before, it will be a negative number — but now you know by what amount in percentage terms.

For example, say your security typically doesn’t reach a speed of more than 30 percent in any ten-day period before pausing or retracing. You can use this useful ingredient to predict a new move, using momentum as a leading indicator. When you see the indicator reach the 30 percent mark, you expect traders to do what they usually do: Cause a price pullback by taking profit. You can anticipate them and exit early, join them at the same time, or wait it out, depending on the other conditions on the chart and your trading plan.