The Ease of Movement indicator refers to a proven and fairly reliable analysis tool. Therefore, I recommend paying attention to it. Its author is Richard Arms, a well-known trader in the markets. The indicator works by analyzing volumes. It differs from other instruments of this kind in that it demonstrates high signal accuracy. In addition, the EOM is a self-sufficient indicator. This means that it is allowed to build your trade only according to his testimony. However, an additional signal filter never hurts. As for the settings, there are only three parameters: the period, as well as the maximum and minimum volumes that must be taken into account in the calculations.
On the chart, the indicator is a curve that changes its position relative to the zero level
The Ease of Movement indicator analyzes the relationship between price and volume. More specifically, the price is calculated using the following formula:
(max of the current day + min of the current day) / 2 minus (max of the previous day + min of the previous day) / 2
The resulting value is related to the volumes.
If the indicator line rises above the 0 level, then this indicates an uptrend. You can consider opening a buy order. Accordingly, and vice versa. If the blue line is below the zero level, then we have a downtrend in the market. Sell orders can be opened.
This system works very well when combined with strong levels. Suppose there was a breakdown of such a level. But we know that it can turn out to be false. Our indicator can be used to assess the breakout. For example, the price has broken through the resistance level. In this case, the indicator line is above zero. This means that the price will most likely continue to move up. You can buy. If the price has broken through the support level and the indicator line is below zero, you can sell.
In addition, you can open additional buy trades as long as the indicator is in the positive zone and sell trades if the indicator is in the negative zone.
The Ease of Movement indicator can be successfully used in options trading. The rules are very simple. The curve crossed the 0 level in the upward direction – buy a call option. The curve crossed the level from top to bottom – buy a put option.
To get started, get the skills to work with this technical analysis tool in demo trading. And only then you can switch to real trade.