The stock market is full of ups and downs. Prices rise and fall depending on the day. Sometimes it can seem like there is little correlation between the direction of a stock’s momentum and day-to-day trading. Investors and stockbrokers who can successfully identify price trends, analyse and interpret the data about that trend, and use it to their advantage stand to maximize exponentially on the value of their trades.
One important metric to consider is the strength of the current trend. Wise investors use a tool called the ease of movement (EOM) indicator in conjunction with other technical analysis tools to help determine just how strong an ongoing trend is.
What is the Ease of Movement Indicator?
The EOM is a type of oscillator that seeks to measure both momentum and volume using one single tool. The oscillator is derived by calculating the distance that a stock price moves over a certain period of time, then dividing by something called a box ratio, which is a ratio related to trade volume. Therefore, EOM is a measure of both a stock’s momentum and its volume.
Ease Of Movement | Indicator Series Click To TweetAt its core, the ease of movement indicator is best used to mathematically describe how easily prices are able to rise and fall within a trend, and how much resistance they are likely to encounter as they move. Click this link to access an economic calendar for your trading strategies
How Does the Ease of Movement Indicator Work?
The EOM indicator is considered an oscillator because it is plotted around a zero line. Where the EOM values fall in relation to the zero line shows information about the strength of a trend. If the value falls above the zero line, then the stock momentum is positive. Conversely, if the value falls below the zero line the stock’s momentum is falling. The volume of the box ratio determines if the direction is strong or weak.
How Can I Use the EOM to My Advantage?
When stock pricing is in the midst of a trend, the big question on every trader’s mind is how long will the trend last? If you have some idea about the strength of the trend and that the price’s direction will continue its forward motion, you can use that information to determine your trading strategy going forward. Understanding the trend’s strength allows you to trade more confidently while minimizing the uncertainty of sudden market shifts. To maximize the EOM’s effect, it pays to analyse it in conjunction with other technical tools. Employing the EOM oscillator in this manner can help investors not only understand a price trend’s strength but also anticipate reversals and divergences down the road.
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