Add to your trading arsenal with the Ease of Movement Indicator. It suits different charts and alongside other tools, it can help to confirm opportunities.
Ease of movement is the name of a momentum indicator. It highlights how an asset’s volume relates to the rate of change in its price and you can use it with the daily chart and also for longer duration charts too.
As the name might suggest, the greater the size of the indicator, the easier the price movement is deemed to be, and that points to a strong trend.
A bigger positive value is indicative of a price that’s shifting upward on the back of relatively low volume. On the flip side, a bigger negative amount suggests that the price is heading south on low volume that is not proportionate. In line with this, you would use the ease of movement indicator to give you an idea of how much volume would be required to precipitate a price shift.
When the indicator shows a value that is more than zero, this can be taken to infer that a lot of buying is going on. In the opposite scenario, when the value is less than zero, it suggests that selling is happening. In the language of technical analysis, it’s worth noting that buying is referred to as “accumulation” while selling is called “distribution.”
Calculation of the Ease of Movement Indicator
There are three steps to an ease of movement calculation. Number one involves working out the difference between the high band and the lower band for this particular asset.
Secondly, we work out how much the price has moved during any particular timeframe and the volume change that’s transpired during that period of time. The final step involves working out price movement in relation to volume, so we can then get a moving average by taking into account several data points.
Distance is worked out using both present and previous price inputs.
Distance = (High + Low) / 2 – (Previous High + Previous Low) / 2
The indicator uses volume and the current high-to-low range to find the “box ratio”, worked out like this:
Box Ratio = (Volume / X) / (High – Low)
X here is an integer factor that’s used to normalize the number, i.e constrain it to something that is easily understandable, within the normal range that people encounter, as anything too high or too low becomes effectively meaningless. The value is usually between one million and 100 million since that’s how many shares will normally change hands on a typical day.
A single-period ease of movement is worked out by dividing the distance we arrived at in the first step by the box ratio, like this:
Single-Period Ease of Movement = Distance/Box Ratio
But we work out ease of movement using the same idea that we use to get a moving average. So various single-period ease of movement measurements are added together and divided by the number of periods under consideration.
Over time, this helps to level out any kinks from the indicator, making it easier to identify trends and also any areas where there seem to be convergent or diverging activity.
(An area of convergence is one where the price runs in one direction and ease of movement travels the same way after they’ve been apart for a while. A divergent area is one where the price of the indicator is running in opposition.)
How to Use Ease of Movement
You can also use ease of movement to confirm other indicators.
For instance, you can use ease of movement that goes above or below zero in the pertinent direction to confirm a breakout above or below the Bollinger bands, any time you’re using them as a trading signal.
You’d exit the trade either when there’s a break under zero (or whatever level you specified) on the ease of movement or a brush with the middle band on the Bollinger bands.
Some market players will enter a trade when they see a break either below or above the zero line. Above means bullish, so you’d want to buy or go along with it, while less than zero bearish, and means you might be better off with a sell or short trade.
To minimize the risk of reacting to bad signals, some traders will set a certain threshold above or below the zero line, and this is particularly necessary for certain consolidating markets where zero-crossings happen much more frequently.
For instance, on the S&P 500 daily chart, it might be prudent to only go long when the ease of movement indicator hits more than 10,000, or short when it goes below -10,000. That value is just a ‘for instance’. The actual number will vary according to which asset you’re looking at.
The space inside the initial pair of vertical white lines is indicative of a buy/go long signal when the indicator rises past 10,000 and to close when it returns under 10,000 again. The other pair of lines is a sell/short signal when it’s below -10,000 and a close when it heads back above it once more.
The ease of movement indicator is designed to track price in relation to volume.
The higher the value the more potent the uptrend, as suggested by a positive price change that’s of greater magnitude compared to volume. In the same way, when the negative value is greater it’s pointing towards a more potent downtrend, as evidenced by the price falling by a greater amount than the volume is rising.
Seeing the price move in one direction more easily (by which we mean that each unit of volume takes it further in one direction compared to another) might influence a trader towards trading in that particular direction. The indicator going over zero might be taken for a bullish signal, while less than zero points to a bearish signal.
The ease of movement indicator is a useful tool, but you shouldn’t be tempted to use it on its own. It’s the same story with any indicator. You can use it most effectively by running it in tandem with other indicators, where it can be used to help reach a consensus on signals.