Developed by Dr Alexander Elder, the Force index combines price movements and volume to measure the strength of bulls and bears in the market. The raw index is rather erratic and better results are achieved by smoothing with a 2-day or 13-day exponential moving average (EMA).
● The 2-day EMA of Force is used to track the strength of buyers and sellers in the short term;
● The 13-day EMA of Force measures the strength of bulls and bears in intermediate cycles.
If the Force index is above zero it signals that the bulls are in control. Negative Force index signals that the bears are in control. If the index whipsaws around zero it signals that neither side has control and no strong trend exists.
● The higher the positive reading on the Force index, the stronger is the bulls’ power.
● Deep negative values signal that the bears are very strong.
● If Force index flattens out it indicates that either (a) volumes are falling or (b) large volumes have failed to significantly move prices. Both are likely to precede a reversal.
The 2-day Force index is used as part of Dr Eder’s Triple Screen trading system.
Dr. Alexander Elder is one of the contributors to a newer generation of technical indicators. His force index is an oscillator that measures the force, or power, of bulls behind particular market rallies and of bears behind every decline.
The three key components of the force index are the direction of price change, the extent of the price change, and the trading volume. When the force index is used in conjunction with a moving average, the resulting figure can accurately measure significant changes in the power of bulls and bears. In this way, Elder has taken an extremely useful solitary indicator, the moving average, and combined it with his force index for even greater predictive success.
Only trade in the direction of the trend – indicated by the slope of the 13-day EMA.
● Go long if the Force index is below zero and there is a bullish divergence.
● Go short if the Force index is above zero and there is a bearish divergence.
● A rising force index, above zero, helps confirm rising prices.
● A falling force index, below zero, helps confirm falling prices.
● A breakout, or a spike, in the force index, helps confirm a breakout in price.
● If the force index is making lower swing highs while the price is making higher swing highs, this is bearish divergence and warns the price may soon decline.
● If the force index is making higher swing lows while the price is making lower swing lows, this is bullish divergence and warns the price may soon head higher.
● The force index is typically 13 periods but this can be adjusted based on preference. The more periods used the smoother the movements of the index, typically preferred by longer-term traders.
The difference between the current and previous prices Close, multiplied by the trading volume in the current candle, gives the so-called «raw» Force Index:
Raw Force Index (i) = Volume * (Price Close (i) – Price Close (i-1))
Naturally, in the usual Forex trading terminal we mean a teak volume, then the indicator line turns out to be too «nervous» with a lot of rips and bursts.
If the current price of Close is higher previous («bull» market), then the result of calculation of the Force Index – positive; if below (a «bear» trend), – negative.
Value of force of the market is defined by not only the direction and amplitude of the movement but also volume.
The All Ordinaries Index (Australia) is shown with 13-day exponential moving average (EMA) and Force Index.
1. A deep spike marks the end of a down-trend but it also warns traders to expect a re-test of the previous bottom.’
2. Go long [L] on the bullish divergence. Wait for the EMA to turn upwards.
3. Declining peaks signal that bulls’ strength is fading. No action is taken on the bearish divergence – the EMA is still rising.
4. The Force index falling below zero indicates that the bulls have lost control. On the strength of the bearish divergence – go short [S] when the EMA turns downward.
The Force Index oscillates above and below zero. When above zero, price is considered to be in an uptrend. When below zero, price is considered to be in a downtrend. If price and the index diverge, then it may be an indication that a change in the trend could be forthcoming.
A longer period on the indicator will produce a smoother trajectory and fewer oscillations. A shorter period will produce a more volatile trajectory and more frequent oscillations. While this may be more suitable for those with shorter timeframes, it will be prone to a greater number of false signals.
Accordingly, a longer period will generate fewer signals while a shorter period will generate more signals.
The index can inform a trader of certain volume-related developments that price alone will not pick up on. A potential divergence between the indicator and price may indicate potential upcoming reversals.
For example, if price is moving higher but the index is moving lower, it might mean that the uptrend is losing strength and a price reversal could be in store. Likewise, if price is moving lower but the index is moving higher, it might mean that the downtrend could be losing power and the probability of a price reversal is increasing.
It must be noted, however, that divergence should not be considered a trade signal in itself. Divergent paths between price and the index can last for elongated periods. Therefore, traders who utilize the index are best to consider other indicators in conjunction.
The indicator is often used alongside an exponential moving average (EMA) of the same period settings. For example, someone using a 21-period Force Index could filter trade signals using a 21-period EMA. Trades would be taken in the general direction of the trend, as dictated by the slope of the moving average or potentially price action or candlestick patterns.