What is the Ease of Movement Indicator?

Source: Gate

The Ease of Movement Indicator is a technical analysis tool built to show the interaction between price changes and the trade volume. It measures how easy or hard the movement of an asset’s price is, aiding the trader in making informed decisions. The indicator is backed by a theory that suggests that if the price of an asset moves easily, it may stay in that direction for an extended period of time.

By measuring the price changes in relation to the trade volume, the trader is able to spot the trade’s weaknesses and strengths and determine whether the asset will continue as it is or change direction.

The Ease of Movement Indicator (EMV) usually results in either a positive or negative result. A positive result means the asset is moving up easily and should likely keep doing so, signaling to traders to buy more rather than sell. Meanwhile, negative results indicate that the asset is falling easily, signaling that more traders are looking to sell the asset.

Lastly, the indicator can inform the trader about possible breakouts and collapses before they occur, granting the trader an added advantage when making decisions about entering or exiting a trade.

History of The Ease of Movement Indicator

The Ease of Movement Indicator was developed by Richard W. Arms in 1967, who introduced the indicator in his book titled “Volume Cycles in the Stock Market.” He created the EMV to provide a simpler way to trade using the price of the asset and the volume of the asset.

How Does The Ease of Movement Indicator Work?

The Ease of Movement indicator is an important tool that measures just how connected an asset’s price and trading volume are. It measures how far the price of the asset changed with every unit traded. The result is then transferred onto a graph as a line that moves between the middle zero line on the graph.

When the EMV line rises above zero, it means the asset rises smoothly, which is referred to as positive movement. Alternatively, if the line drops below zero, it means the asset is falling smoothly, which is known as negative movement.

To draw the Ease of Movement Indicator, you need to carry out certain calculations that use the price range against the volume to help show the asset’s movement. The first step in calculating the EMV is to derive the midpoint for each period. This is done by selecting the current lowest price point of the asset, adding it to the current highest price point of the asset, and dividing the addition by two, giving the equation [ (High+Low) / 2 ].

The next step is to derive the distance moved, which can be obtained by subtracting the current midpoint from the previous one [ (High+Low) / 2 ]—[ (Previous High+Previous Low) / 2 ]. This is essential in understanding the direction in which the price of the asset is heading and how much it has changed.

Once that is done, the next step is calculating the box ratio, which includes the asset’s volume and a scale from 1000 to 1,000,000,000, depending on the asset’s average daily volume. The formula is [ (Volume/Scale) / (High—Low) ] and informs the trader what volume is needed to affect the price range.

Once that is done, the next step is to calculate the EMV, which is the distance moved divided by the box ratio (Distance Moved / Box Ratio). The derived value grants traders an in-depth view of how the price range and trade volume affects the market, properly showcasing other traders’ views of the market and possible trends that might occur.

How to Use the Ease of Movement Indicator

Source: FX Open

The Ease of Movement (EMV) Indicator can aid traders in making informed trading decisions. By analyzing the effects of volume and price change on assets, traders can smartly trade their favorite assets to maximize their profit.

To make the best use of the indicator, traders should look for two major signals after calculating the EMV before entering trades. The first one is when the EMV value rises above zero, hinting at the asset’s smooth and consistent rise and thereby indicating a positive trend. The second signal is when the EMV value drops below zero, meaning the price is falling smoothly, indicating a negative trend.

However, when there is a significant difference between the EMV value and price change, it is a sign to the trader that a change in direction might occur. For example, when the asset price reaches new heights, but the EMV price remains the same, this could indicate there might be a change from a positive trend to a negative trend.

Additionally, the Ease of Movement (EMV) indicator is not an independent indicator, meaning it works alongside another indicator to confirm the findings of that indicator or the trader’s chart analysis. Chartists use the EMV to confirm a breakout on the chart or identify a bullish signal. Alternatively, they also use it to confirm a breakdown or bearish signal.

Trading Strategies to Apply Using the Ease of Movement Indicator

There are several use cases for the Ease of Movement Indicator, and several strategies can be applied to make the best of the indicator. Some of these strategies include:

Trading Zero-Line Crossovers

Source: How To Trade

The major trading strategy when using the EMV indicator is monitoring zero-line cross-overs. While it is best to use the indicator alongside others to get the best result, it can also be used in isolation to identify bullish signals when the indicator line crosses zero and a bearish signal when it drops below zero.

Setting Stop Losses And Take Profits

Source: How To Trade

When trading, traders are advised to place a stop loss regardless of their adopted strategy. The stop loss is usually placed below the most recent price low if the trader looks to take a bullish trade. Meanwhile, if the trader adopts a bearish strategy, they must place the stop loss above the recent price high.

Trading Divergences

Source: How To Trade

A popular trading strategy adopted using the EMV indicator is trading divergences. These divergences occur when the price points and the EMV points are not aligned. For example, when the price and the EMV show low points but the price is higher than the EMV, we call that a bearish divergence. When both show a low point, and the price is lower than the EMV point, we call that a bullish divergence.

In a bullish divergence, traders are often advised to buy in expectation of a rise in the asset’s price, while in a bearish divergence, they often sell to secure their profit.

Advantages of The Ease of Movement (EMV) Indicator

The Ease of Movement Indicator provides users with a detailed view of how the market moves and works, allowing traders to make informed decisions on when to enter a trade or sell. By using the analysis tool, traders are exposed to the following advantages:

• It processes information about an asset’s price and volume, giving further insight to the trader.
• It helps the trader identify how difficult it is for an asset to move in a specific direction.
• It helps traders and asset holders understand how people feel about the market and could open other trading chances they would not have noticed if they relied on tools that only took the price of the asset into consideration.
• It removes the confusion caused by fluctuating price changes by only picking and analyzing specific points in the market trend.

Limitations of The Ease of Movement Indicator

While the Ease of Movement Indicator is a powerful tool, its major limitation is its vulnerability to big changes in trading volumes, which might affect the information derived at the end of the analysis. A quick rise in the asset’s volume, which does not lead to a permanent change in the market trend, can influence the EMV indicator, making it appear that the market is not moving the way it should.

This limitation is a major reason traders are advised to use the EMV alongside another tool before they make trading decisions.

Conclusion

The EMV Indicator is a helpful tool for monitoring the market’s movement through its price flow and the asset volume. Aside from helping traders know when to enter and exit a market, it also improves knowledge of the market movement. When paired with other tools, it provides better technical analysis for the trader, solidifying their observations and leading to informed trading decisions.