EP Change Index is an oscillator-type indicator, which provides a simplified view of the price, which clearly shows its trend.
The indicator also presents several elements of interest:
- Line 0. Values above line 0 indicate an uptrend, values below line 0, a downtrend.
- Change Index. It is the main line of the indicator. It draws a kind of "mountains" above or below line 0.
- Average Lines (change+ y change-). They are only displayed in the colored area, showing the background with a more intense color in areas that are above change + or below change-.
- Simple Average Line. It is presented in the form of a black line that always oscillates close to the main line. The areas between the main line and the average line can be shown colorized in blue or brown tones.
- Diamantes. The indicator shows by default some marks called "diamonds". They are not direct buy or sell calls, but can be considered along with other factors. Let's say they are "wake-up calls" indicating that the price is going to move below significantly. We will see later how we can interpret them.
How is it interpreted?
As we have already advanced, the first thing we can deduce is the global situation of the price, its general trend. If the value is above 0 (positive values), the general trend in the timeframe that we are seeing is increasing. If it is below, the general trend will be downward.
But in addition to the Change Index position with respect to line 0, it also indicates its movements whether the price is going down or going up. If the Change Index is going up, a green background will be displayed. If it's going down, a red background will appear.
Let's see this graph:
In the graph, the long entry points shown by the indicator have been marked with arrows. Several patterns can be taken into account:
1.- "Drop" Pattern. It is the pattern that is formed when the main line crosses above the average line, both lines being below line 0.
When the Change Index line is rising, the background color is painted blue. If it is going down, it is painted brown.
This pattern is not always a direct call to purchase. It is more effective if the value of the main line is close to the 0 line.
During a raise, the drop pattern is very effective, showing the best possible point of purchase, showing us the recovery from a correction.
On a steep decline, however, we should wait for the Change Index line to show higher highs, and preferably wait for its value to approach 0.
2.- "Bubble" Pattern. During a descent, it is common for the Drop pattern to end up forming a "bubble", forming an area colored blue on its left side (Change Index going up) and brown on its right side (Change Index going down). The formation of a bubble usually indicates a drop in price, or at least a zone of instability.
At the bottom of a fall, the formation of a succession of bubbles is frequent, indicating a zone of accumulation prior to recovery. We see it perfectly in the upper image, and also in the following:
In this image we see how the indicator marks the first entry, making a short run, but then a "bubble" forms, so, given the proximity of the entry, we should close the operation with that small benefit (a 5% in this case).
Then, after the prolongation of the fall, it enters a consolidation phase, creating a support zone. We observe the formation of two more bubbles. The safest point of purchase occurs when a Drop pattern is formed again, raising the value of the Change Index to values close to 0. We also observe the formation of a divergence between the support line and the peaks formed by Change Index (ever higher lows).
3.- "Peak" Pattern. This pattern is formed when the price rebounds sharply, usually on a support. This bounce is reflected in the Change Index indicator, and in certain situations it may be operable.
Looking at the image, we can see how the beginning of the right ascending wall of the peak can be a good moment to buy, which anticipates the formation of the Drop pattern.
This pattern will be effective in an uptrend or a consolidation, provided the trading range is wide enough to give a reasonable profit.
4.- Oversale and Overbuy. The indicator marks oversale or overbuy situations with a more intense color. It is the result of crossing the main line of the Change Index with an average line, "change +" for positions above 0 and "change-" for positions below zero. As a result, oversale zones are always shown below line 0 with a deep red color. Conversely, overbuy zones are displayed above the 0 line with a deep green color, if the change index is going up, or a deep red color, if it is going down.
Oversale or overbuy zones are not signs of market entry or exit by themselves.
Signals in Change Index for sale positions.
So far, we have described several patterns that can be used to enter "long" positions, that is, buy. But the indicator is also useful for us to detect when we should close these positions, or open a sell position ("short position").
We have advanced how the "bubble" pattern can sometimes anticipate a sale, although it is not decisive. So how can we get into a sell position safely? Continuing with the MSFT example above:
We see various situations. We describe them from left to right:
1.- Sale after a double roof. The indicator shows a much lower "mountain" at the second touch of resistance, the peak that forms the double roof. A diamond is formed and then the Change Index descends looking for 0 level. The Change Index Average begins the descent.
2.- The price, after timidly bouncing off a support zone, goes through it, making a small "pullback" towards the already broken support zone. In Change Index we see how the main line turns downwards, failing to go up to line 0. The average clearly points downwards, also crossing line 0.
3.- Change Index makes an attempt to climb, initiating a possible Drop pattern, but quickly spins, painting a brown color and completing the Bubble pattern, so the drop is expected. The Change Index average has slowed a timid rise and begins to turn down.
4.- Change Index making small peaks above 0. Crosses the 0 line with the average line about to do so, as indicated by the appearance of the diamond.
5.- Drop pattern that has failed "colliding" with line 0 and finally forming a bubble followed by a diamond, so that the main line of the indicator separated from the average falling down.
6. The price bounces off the top of the side channel that has formed. Change Index points down through line 0, the average starts the downward turn. We also see the diamond announcing the separation from the average.
Change Index and other indicators.
It is essential to complete the Change Index signals (or any other indicator) with other signals or trading systems. The sum of several different signals considerably increases the efficacy of our trading.
The use of supports and resistances is fundamental in trading, and we highly recommend it. We have already seen some examples. This new Bitcoin example speaks for itself:
Moving averages, wave theories, pattern formation, etc. are also very useful. We recommend the combined use of Change Index with other EP indicators. Specifically, this is our ideal configuration right now:
EP Prism + EP Change Index + EP Zenith + EP MA.
Before describing how these indicators work together, it is important to know them separately. We leave it here now, we will dedicate a full article later.