What is Ease of Movement Value (EOM)?
The Ease of Movement Value (EOM) developed by Richard Arms, is a technical indicator used to evaluate the relationship between volume and price change. The indicator provides a signal to buy or sell based on the amount of volume required to move a price. The EOM is calculated by taking the difference between the current high and low prices and dividing it by the volume. It is then smoothed using a moving average.
How to use EOM in trading？
To use the EOM, traders typically look for divergences between the indicator and price action. For example, if the price of a stock is making new highs, but the EOM is not following suit, this could be a sign of weakness and a possible sell signal. Conversely, if the price is making new lows, but the EOM is not following, this could be a sign of strength and a potential buying opportunity.
Let's say you are interested in buying shares of the AAPL company. You notice that the stock has been trading in a range for the past few weeks, with no clear direction. You decide to take a closer look at the EOM to see if it can provide any insight.
After calculating the EOM for AAPL, you see that it has been declining steadily for the past few days, even as the price has remained relatively stable. This indicates that the volume required to move the price higher is increasing, which is a bearish sign. You decide to hold off on buying for now, as you believe the stock may experience a pullback in the near term.
A few days later, you check again and notice that it has turned positive, even as the price has remained relatively unchanged. This suggests that the volume required to move the price higher has decreased, which is a bullish sign. You decide to buy shares of AAPL, as you believe the stock is likely to experience an upward trend.
It's important to note that no technical indicator is foolproof, and the EOM is no exception. It should be used in conjunction with other indicators and fundamental analysis to make informed investment decisions. Traders should also be aware of the limitations of the EOM, such as its tendency to lag behind sudden price movements.