What is Price Rate of Change?
The price rate of change is simply the percentage change in a security's price between two periods.
How Does Price Rate of Change Work?
The formula for the price rate of change is:
Price Rate of Change = (Price at Time B - Price at Time A) / Price at Time A
For example, let's say Company XYZ's share price was $10 yesterday and was $5 a week ago. Using the formula above, we can calculate that the price rate of change is:
Price Rate of Change = ($10-$5) / $5 = 100%
Why Does Price Rate of Change Matter?
The price rate of change can be used to measure not just the direction of a trend but the momentum or speed of a stock price trend. For instance, values above zero indicate upward momentum (i.e., an acceleration in buying); values below zero indicate falling momentum (i.e., an acceleration in selling).
Though this information is valuable in its own right, analysts are particularly interested when the price of the security goes in the opposite direction of the price rate of change. For example, when the price of the asset is decreasing but the rate of change in increasing, a large increase in the stock price may occur, which in turn might indicate a hidden buying opportunity.