Technical analysis tends to give a mathematical face to the emotional factors, which guide the market. But it is a difficult task to logically dissect the trading activity into a straight forward formula.
Hence, it is important to view the market from as many different angles as possible. Looking at the same picture from different angles can often give a better picture to the overall price action.
With this in mind, let's use price action and an indicator to look for potential set up's. The price action can be defined as the normal trading range of the market and we shall use the "Rate of Change" (ROC) indicator to confirm this normal price action or the deviation from it.
The Rate of Change is a simple momentum oscillator that calculates and plots the net change (expressed as a percent) between a bar's price and the price a specified number of bars ago. Basically, it is no different from the Momentum indicator, but it expresses price movement as a percentage around 100 rather than a number of points around a zero line.
The ROC gives a value that will be above 100 (if price is moving higher) or below 100 (if price is moving lower). With the center line set at either 0 or 100, the ROC can be used to identify range bound conditions. As the ROC forms a triangle shape, indicating consolidation we should then take note of what is happening on the candlestick chart.
This is the reason why we have chosen the ROC oscillator. Because, when the market breaks out of its trading range, the ROC will reflect this change as it breaks out of its own consolidation pattern.
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