Ease Of Movement (EMV) Indicator

Ease Of Movement (EMV) Indicator Strategy (Rules And Returns)

Analyzing the financial markets and predicting how the market will move next can be a difficult task but can be made a bit easier with the Ease of Movement (EMV) indicator. What do you know about the Ease of Movement (EMV) indicator and how to use it?

The Ease of Movement indicator is a volume-based oscillator created by Richard Arms to help analyze the relationship between price movements and volume. Because the indicator measures both price volatility and volume, traders often use it to assess the strength of a trend.

In this post, we will take a look at everything you need to know about this indicator: what it is, how it works, how to backtest it, and how you can improve your trading strategies with it. Read on!

Key takeaways

  • The Ease of Movement (EMV) indicator is a volume-based oscillator designed to assess the strength of a trend.
  • EMV values indicate how easily price moves in a direction with corresponding volume levels.
  • The indicator is helpful for predicting potential price reversals and confirming trend strengths.
  • Traders can integrate EMV into strategies by combining it with other indicators or price action analyses.
  • EMV is less effective in volatile markets due to potential frequent false signals.
  • We make a backtest of a strategy with complete trading rules.

What is Ease of Movement (EMV) in trading?

Also known as the Ease of Movement Value (EMV), the Ease of Movement indicator is a momentum oscillator that shows the relationship between price movements and volume. It was created by Richard Arms to help traders understand the strengths and weaknesses of a trend by correlating price changes to volume levels.

When the price moves significantly with little volume change, it could be that there’s ‘ease of movement’ in that direction. On the other hand, if the price moves a little despite huge volume, there may not be ‘ease of movement’ in that direction. Simply put, positive values of the indicator imply that the price is rising fast on low volume, while negative values show that the price is falling fast on low volume.

The indicator is based on the premise that if the price moves easily, it may continue to move in that direction for some time until something forces the trend to change. With this knowledge, traders can position themselves to benefit from the trend.

Ease of Movement trading strategy – trading rules, backtest, returns, and performance

After explaining the index, we can backtest it by formulating some trading rules.

Now that you understand the indicator’s purpose let’s backtest a specific trading strategy with trading rules.

These are the trading rules:

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 350 ARTICLES WITH TRADING RULES

We employ the trading rules on the S&P 500 (SPY) from its inception until today and get the following equity curve:

Ease Of Movement Strategy
Ease Of Movement Strategy

The average is 0.65% per trade. The facts, statistics, and trading performance are summarized like this (the most important metrics are highlighted):

Ease Of Movement trading rules and returns
Ease Of Movement trading rules and returns

The backtest was performed in Amibroker. Amibroker doesn’t include the Ease of Movement indicator, but we have coded it for you. You need to become a member to get access.

How does the EMV indicator calculate market momentum?

The EMV indicator calculates market momentum using a 3-part formula — Distance Moved, Box Ratio, and 1-Period EMV — and then finds an n-period moving average of the 1-Period EMV. Here are the various parts of the formula:

1. Distance Moved: This is the numerator of the EMV formula and is calculated by checking the difference between the current period’s midpoint and the prior period’s midpoint. It is given as follows:

Distance Moved = ((H + L)/2) – ((Prior H + Prior L)/2)

The value is positive when the current midpoint is higher than the prior midpoint. It is negative when the current midpoint is lower than the prior midpoint.

2. Box Ratio: This is the denominator of EMV. It uses volume and the high-low range. The formula is as follows:

(Volume/Scale)/(H – L)

Note that, depending on the average daily volume of the stock, ‘Scale’ could be 1,000 to 1,000,000,000. Thus, for heavily traded stocks, the scale should be higher so that the indicator’s value would be in single or double digits.

3. 1-Period EMV: This is obtained by dividing the Distance Moved by the Box Ratio to find the EMV for one period. (EMV = Distance Moved/Box Ratio).

The combined formula is given as follows:

1-Period EMV = [(H + L)/2] – [(Prior H + Prior L)/2] /[( Volume/Scale)/(H – L)]

Then, an n-period of the 1-Period EMV is calculated to smoothen the data. Often, traders use the 14-period.

14-Period Ease of Movement = 14-Period simple moving average of 1-period EMV

From the formula, you can see that a relatively small volume and a relatively large high-low range would give rise to a smaller denominator (Box ratio), and as such, the EMV value would be larger. Thus, a big price range on low volume would imply relatively easy price movement, as it doesn’t take much volume to move prices.

Conversely, if the high-low range is small and the volume is large, it would produce a larger denominator and, therefore, the EMV value would be smaller. Thus, a small price range on a large volume would imply relatively difficult price movement, as it takes a huge volume to move the price.

Why is EMV important for assessing stock liquidity?

The EMV is important for assessing stock liquidity because it already factors the stock’s liquidity in the ‘Scale’ part of its calculation and gives values relative to its average liquidity. The indicator shows how much volume was needed for the current price movement. That is, it shows how much the price moves per unit of trading volume.

So, if a relatively small volume can move the price significantly, it means there is a high ease of price movement. On the other hand, if a relatively huge volume is needed to move the price, there is less ease of movement in the stock.

Can EMV help predict potential price reversals?

Yes, the EMV can help predict potential price reversals if there is a divergence between its signals and the price action. A divergence is said to have occurred if the price is making new highs while the EMV is making lower highs (bearish divergence) or the price is making lower lows while the indicator is making higher lows (bullish divergence).

When there is a bearish divergence, the price could be ready to reverse to the downside from an uptrend, and when there is a bullish divergence, the price could reverse to the upside from a downward trend.

How can traders use EMV to confirm trend strength?

To use the EMV to confirm trend strength, traders understand that the indicator fluctuates around a midline (zero-line) and a positive value (above the zero-line) indicates a bullish trend while a negative value (below the zero-line) indicates a bearish trend.

So, when the indicator is above the zero-line and rising, it means that the price is rising on low volume — it is relatively easy for the price to go up. On the other hand, when the indicator is below the zero-line and falling, it means that the price is falling on low volume — it is relatively easy for the price to fall.

What are the key components of the EMV formula?

The key components of the EMV formula are as follows:

Distance Moved: It is the numerator of the EMV formula and measures the difference between the current period’s midpoint and the prior period’s midpoint. It is given as follows:

Distance Moved = ((H + L)/2) – ((Prior H + Prior L)/2)

The value is positive when the current midpoint is higher than the prior midpoint. It is negative when the current midpoint is lower than the prior midpoint.

Box Ratio: It is the denominator of EMV. It uses volume and the high-low range. The formula is as follows:

(Volume/Scale)/(H – L)

Being the denominator, when this value is high, the EMV would be small, and when it is lower, the EMV would be large.

How does EMV differ from other momentum indicators?

The EMV differs from other momentum indicators in that it uses both price and volume changes to measure price momentum. This is unlike other momentum indicators, such as the RSI, stochastic, and rate of change, which measure price momentum based on price changes only.

With the EMV, you would know when a price movement happens on low trading volume — in which case it would imply a greater ease of movement. If the price requires a huge volume to make a given move, the ease of movement is low.

When should traders consider EMV in their analysis?

Traders should consider EMV in their analysis when they want to understand the influence of volume in a particular price movement. That knowledge would help them ascertain how easy it is for the price to move in that direction and thus confirm their bias in that direction.

It is often better to use another method (indicator or price action) to identify the price trend and then use the EMV to verify their bias in that trend direction.

How does EMV help identify buying and selling opportunities?

EMV can help in identifying buying and selling opportunities by showing us when the price moves with relative ease in a particular direction and when the ease of movement is subsiding. For example, when the EMV is above the zero line and rising, it means that the price is rising with ease, so a trader can look for buying opportunities.

On the flip side, when the EMV is declining below the zero-line, it means the price is falling with ease, so a trader can look for selling opportunities. A divergence between the price and the indicator can also help in identifying buying and selling opportunities.

What role does volume play in EMV calculations?

Volume plays a crucial role in the EMV calculation. It is a key and direct component of the Box Ratio, which is the denominator in the EMV calculation. Thus, it has an inverse effect on the overall value of the EMV. The lower the volume relative to the price range over the given timeframe, the higher the EMV and, therefore, the greater the ease of price movement. The opposite is true too: the higher the volume relative to the price range, the lower the EMV and the less ease of price movement.

How reliable is EMV in volatile markets?

The EMV may not be reliable in volatile markets, as prices keep spiking up and down. During such market conditions, the EMV may produce frequent false signals. To reduce this situation, you can use a higher-period moving average to smoothen the indicator. Alternatively, you can use another indicator that warns you about market conditions to know when not to trade with the EMV.

Are there limitations to using EMV as a standalone indicator?

Yes, there are limitations to using the EMV as a standalone indicator. Here are some of them:

  • The EMV lags: As with most technical indicators, the EMV makes use of past price data and, as such, it lags the price.
  • It can give frequent false signals: The indicator can give false signals, as it doesn’t know when the market conditions will change.
  • It can’t tell when the market is choppy: The EMV cannot tell when the market is choppy, and during such situations, it’s more than likely to give frequent false signals.

How can traders integrate EMV into their trading strategy?

Traders can integrate the EMV into their trading strategy by combining the indicator with other trading indicators or price action analysis to develop a unique trading strategy with clear entry and exit criteria, position sizing, and risk management plans.

It is not smart to use the EMV alone to decide when to enter or exit a trade. Traders need to use it with other analysis tools to have a better understanding of the market structure and price movements. For example, it can be used with a moving average and an RSI: the moving average identifies the trend and the EMV confirms it and the relative ease of price movement in that direction; then, the RSI is used to find the right entry period.

What are common misconceptions about EMV?

The two common misconceptions about the EMV are as follows:

  • The EMV can be a trading strategy on its own: It is only an indicator and cannot be a strategy on its own. The trader must combine it with price action analysis or other indicators to define entry and exit criteria.
  • The EMV can tell you what would happen in the market: Like other indicators, it cannot tell you what would happen next with any certainty. All predictions are based on probabilities.

How does EMV complement other technical analysis tools?

The EMV complements other technical analysis tools by showing how easy or difficult it was for the price to move in any direction it is trending. So, it can be used to confirm trends, as well as get a clue when the trend is losing steam.

For instance, if your moving average indicator or price structure shows that the price is trending upwards, you can use the EMV to confirm that the price is rising with relative ease. If the EMV shows that the price rise is facing some difficulties — EMV is positive but declining — it may be wise to watch out for a potential reversal or at least, a deep pullback.

Can EMV be used in conjunction with fundamental analysis?

Yes, the EMV can be used in conjunction with fundamental analysis to make a better trading decision. Your fundamental analysis can tell you whether there are fundamental factors in place to move the price in a particular direction. Then, you can use the EMV to confirm the ease of movement in that direction before trading. Also, an EMV divergence can support a fundamental analysis that points to a trend reversal.

How do traders interpret EMV divergence?

Traders interpret EMV divergence the same way other indicator divergence is interpreted. When the price is making new highs while the EMV is making lower highs, a bearish divergence is said to have occurred, and it signifies that the price could be ready to reverse to the downside from an uptrend.

On the flip side, when the price is making lower lows while the indicator is making higher lows, you have a bullish divergence, which implies that the price could reverse to the upside from a downward trend.

What are some practical examples of EMV application?

Here are some practical examples of the EMV application:

Example 1: A buy signal on US30:

In the chart below, you can see that the price crossed the moving average (yellow line) to the upside and the MA has changed direction to the upside too. Then there’s a price pullback and afterward, the EMV turns upwards above the zero level, signaling a greater ease to upward movement. That might be a buy signal.

EOM indicator how to use it
EOM indicator how to use it

Example 2: A sell signal on US30:

In the chart below, you can see that the price is trending downwards. After a pullback to the moving average, the price turned bearish again. The EMV confirmed the bearishness by falling sharply below the zero level and continued falling. That might be a sell signal.

Ease Of Movement indicator example
Ease Of Movement indicator example

How frequently should traders monitor EMV readings?

How frequently traders should monitor the EMV depends on their styles of trading and the trading timeframes they use. Scalpers and day traders would definitely have to monitor the indicator more frequently than swing traders and position traders. A position trader may check the indicator once a week and a swing trader probably once a day, while a day trader may have to monitor it every hour or 15 minutes depending on the trading timeframe used.

What are the historical origins of the EMV indicator?

The history of the EMV indicator dates back to 1967 when Richard W. Arms introduced the indicator in his book: “Volume Cycles in the Stock Market.” In creating the EMV, the author was looking for a way to simplify the price and volume relationship in stock trading.

How does EMV contribute to risk management strategies?

The EMV does not directly contribute to risk management strategies because it neither tells the trader how much position size to use, nor which level to keep their stop-loss order. However, the indicator can be used to formulate a reasonable trading strategy that can be backtested to find the most optimal risk management variables to use while trading.

That is, data from backtesting can tell you the right amount to risk per trade, the appropriate position size per trade, and the right level for your stop-loss order.

Are there variations of EMV used in different markets?

No, there are no variations of the EMV in different markets, but the name may be different. While some call it the Ease of Movement indicator (EOM), others call it the Ease of Movement Value (EMV). Whatever the name, it’s still the same indicator, and the calculation is based on the same principle.

How do EMV signals compare to other momentum indicators?

The EMV compares favorably to other momentum indicators because it uses both price and volume changes to measure price momentum. Unlike other momentum indicators, such as the RSI, stochastic, and rate of change, which measure price momentum based on price changes only, the EMV tells you whether a price movement happens on a low trading volume or a huge trading volume. This can tell you how easy or difficult the price moves in whichever direction it is moving.

What are the potential drawbacks of relying solely on EMV?

The potential drawbacks of relying solely on the EMV include:

  • It lags the price because it uses past price volume data in its calculations.
  • It can give frequent false signals since it doesn’t know when the market conditions will change.
  • It can’t identify when the market is choppy and unfavorable for trading.

How can beginners learn to interpret the EMV charts effectively?

Beginners can learn to interpret the EMV charts effectively by seeking trading education from the right sources. They would need to learn how the price moves and how price movements relate to volume, as well as how indicators like the EMV try to use price and volume data to distill out specific information about the market. Examples of where to find trading knowledge include this blog and websites like therobusttrader.com and quantifiedstrategies.com.

Similar Posts