How to Use the Ease of Movement Indicator in Trading
Trading in a financial market typically requires a thorough understanding of technical analysis tools and indicators. Unlike many indicators that solely focus on price, the Ease of Movement (EOM), also known as Ease of Movement Value (EMV), indicator analyses the relationship between volume and price to provide relevant insights into market conditions. With this, you can analyse when to enter and exit a trade. This FXOpen article provides more information about the EMV and explains how to apply it to your trading strategies.
What Is the Ease of Movement Indicator?
The ease of movement indicator is a technical analysis tool that is useful for trading in financial markets. With this indicator, analysing the relationship between trading volumes and price changes is more manageable. In theory, if the price moves easily, it may continue to move in that particular direction for a longer period. With this knowledge, you can understand the strengths and weaknesses of a trend and position yourself to benefit from a trend shift.
EMV was developed by Richard W. Arms Jr, who introduced it in his book “Volume Cycles in the Stock Market” in 1967. Using an ease of movement strategy, you get an understanding of the ease with which prices move in a certain direction.
How to Calculate the Ease of Movement Indicator
The steps to calculate EOM are as follows:
- Calculate the midpoint for each period. This is the average of high and low prices for a given period. This is formula:
Midpoint = [(High + Low) / 2 ] - [(PH + PL)/2]
Where PH and PL are previous high and low prices, respectively.
- Next, calculate a box ratio for each period. This parameter directly measures the relationship between volume and price. It provides insights into how price movement occurs in relation to volume traded. The given formula is:
Box ratio = (Volume / Scale) / (High - Low)
The scale for volume usually varies between 1,000 to 1,000,000,000. This typically depends on the asset's daily volume. Generally, heavily traded assets use a higher scale to keep the indicator value in single to double digits.
- 1-period EMV is the midpoint divided by the box ratio. This gives:
[(H + L) / 2 - (PH + PL) /2] / [Volume / Scale / (H - L)]
Applications of the Ease of Movement Strategy
The EMV indicator has several applications in trading. Here are some ways it can be applied:
Trend Identification
You can identify the direction and strength of a trend using the EOM. When the indicator line is positive, it typically suggests that prices are moving in an upward direction. The higher the line, the lower the resistance, which indicates a strong trend. Similarly, when the indicator is negative, it may indicate a downtrend. The lower its value, the stronger the downward movement is.
Here’s a chart to aid your understanding
The indicator was moving below 0 during the downtrend but by the end of that trend, it plunged. This could be considered a signal of an oversold market and a sign of a potential trend reversal.
Divergences
When using the TickTrader platform, you can detect divergence between the price and the EOM. For instance, when prices tend to be on the rise, but the indicator line is declining, it is a bearish divergence and a sign of a potential price decline. Conversely, it’s a bullish divergence when the price falls, but the indicator rises. This development may suggest that the trend is losing its momentum, and a potential upward reversal may be in sight.
Chart showing a bullish divergence:
In the chart above, the price and the ease of movement indicator formed a bullish divergence. A trader could use it as a signal of a trend reversal and close a sell trade or open a buy position.
Confirmation Tool
When combined with other technical indicators, such as the moving average, the ease of movement can serve as a confirmation tool. For example, if you observe a bullish signal from an indicator, you can use the EOM to further confirm its signal. This generally adds conviction to your trading and ensures you can enter the market or keep the position open.
Check this chart for a vivid illustration:
In the chart above, the price is moving in a strong uptrend, which is confirmed by both the simple moving average indicator, as the price stays above it, and the EOM tool, as it keeps fluctuating above 0.
Pros and Cons of Using the Ease of Movement Indicator
You can derive various advantages from using this indicator. The pros include:
- You can get a holistic view of the market as the indicator considers both volume and price data.
- It’s also quite simple to interpret as a positive value suggests an uptrend, while a negative value suggests a downtrend. This simplicity makes it more manageable for traders of varying experience levels to upgrade their technical analysis and make better-informed decisions.
While the EOM could give you valuable insights into market conditions, identifying its limitations and potential setbacks may help you better utilise it to your advantage. Here’s a list of its drawbacks:
- The ease of movement can be sensitive to short-term fluctuations and market noise. This may generally result in whipsaws or false signals. You could overcome this challenge by using other analysis tools to confirm signals and having a thorough understanding of the overall market context.
- As ease of movement relies on historical data, it may take a while for it to reflect recent volume changes or price movements. This inherent lagging nature may cause delays in identifying and leveraging trading opportunities.
Final Thoughts
Using an EOM indicator when trading can help you catch numerous trading opportunities. Moreover, understanding its limitations and using other technical analysis strategies for confirmation could help you adopt it in your trading approach. With this, you will navigate the complexity of the financial market with enhanced confidence. When you feel ready, you can open an FXOpen account and apply your knowledge to the real market.