What does the rate of change measure in trading?

The rate of change in trading specifically measures the speed at which the price of a security is changing over a specific period of time. It uses the formula (Price today - Price n-periods ago)/n, effectively quantifying the difference between the current price and the price from 'n' periods back, then averages that change over 'n' periods.

This formula allows traders to analyze momentum and identify potential trend reversals by understanding how rapidly the price is increasing or decreasing. By applying this calculation, traders can assess whether a security is gaining strength or losing momentum, which can inform their decisions on entering or exiting positions.

The other options reflect different types of calculations related to price but do not capture the essence of how the rate of change is calculated and interpreted in market analysis. For instance, measuring percentage change over a specified period is related but does not provide the same direct granularity regarding the rate of change. Other options consider averages or straightforward price comparisons, which are not specific to measuring the rate of change.