Force indicator

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Force Index and Uses

What Is the Force Index?

The force index is a technical indicator that measures the amount of power used to move the price of an asset. The term and its formula were developed by psychologist and trader Alexander Elder and published in his 1993 book Trading for a Living. The force index uses price and volume to determine the amount of strength behind a price move. The index is an oscillator, fluctuating between positive and negative territory. It is unbounded meaning the index can go up or down indefinitely.

The force index is used for trend and breakout confirmation, as well as spotting potential turning points by looking for divergences.

Key Takeaways

  • 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 Formula for the Force Index Is:

How to Calculate the Force Index

  1. Compile the most recent closing price (current), the prior period’s closing price, and the volume for the most recent period (current volume).
  2. Calculate the one-period force index using this data.
  3. Calculate the exponential moving average using multiple one-period force index calculations. For example, to calculate a force index (20) will require at least 20 force index (1) calculations.
  4. Continually repeat the steps after each period ends.

What the Force Index Tells You

A one-period force index is comparing the current price to a prior price and then multiplying that by volume over that period. The value can be positive or negative. Typically the force index is averaged over several periods, such as 13, or 100. Therefore, the force index tells whether the price has made more progress upwards or downwards, and also how much volume or power is behind the move.

High force index readings are associated with very strong price moves and very high volume. Large price moves that lack volume will result in a force index that is not as high or low (compared to if the volume was large).

Because the force index helps to gauge market power or force, it can be used to help confirm trends and breakouts.

Strong rallies in price should also see the force index rise. During pullbacks and sideways movements, the force index will often fall because the volume and/or the size of the price moves gets smaller.

During strong declines, the force index should fall. During bear market rallies or sideways corrections, the force index will level off or move up because the volume and the size of the price moves typically taper off.

Breakouts, from a chart pattern, for example, are usually confirmed by increasing volume. Since the force index factors for both price and volume, a force index spike in the direction of the breakout can help confirm the price breakout. Lack of volume, or non-confirmation, from the force index could mean the breakout is more likely to fail.

When the above guidelines fail that may indicate a problem with the price/trend, and therefore a potential price reversal. For example, if the price is making higher highs but force index is making lower highs, that is called a bearish divergence and the price may be due for a decline. If the price is making lower lows and the force index is making a higher low, that is a bullish divergence and the price may soon rise.

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The Difference Between the Force Index and the Money Flow Index (MFI)

The money flow index (MFI), like the force index, uses price and volume to help assess the strength of a trend and spot potential price reversals. The calculations of the indicators are quite different, though, with MFI using a more complex formula which includes the typical price (high + low + close / 3) instead of just using closing prices. The MFI is also bound between zero and 100. Because the MFI is bound and uses a different calculation, it will provide different information than the force index.

Limitations of Using the Force Index

The force index is a lagging indicator. It is using prior price and volume data, and then that data is used to calculate an average (EMA). Because the data is typically put into an average, it may sometimes be slow to provide trade signals. For example, it may take a couple of periods for the force index to start rallying after an upside breakout, but by this time the price may have already moved significantly beyond the breakout point and may thus no longer justify an entry.

A shorter-term force index (10, 13, and 20 for example) creates a lot of whipsaws, as even moderate price moves or volume increase can cause big swings in the indicator. A longer-term force index (50, 100, or 150 for example) won’t make as many swings, but it will be slower to react to price changes and will be more delayed in providing trade signals.

Defining the Force Index

What Is the Force Index?

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.

How the Force Index Works

The force index is calculated by subtracting yesterday’s close from today’s close and multiplying the result by today’s volume. If closing prices are higher today than yesterday, the force is positive. If closing prices are lower than yesterday’s, the force is negative. The strength of the force is determined either by a larger change in price or a larger volume; either situation can independently influence the value and the change in force index.

The raw value of force index is plotted as a histogram, with the centerline set to zero. A higher market will result in a positive force index, plotted above the centerline; a lower market points to a negative force index, below the centerline. An unchanged market will return a force index directly on the zero line. The raw line that is plotted over the day-to-day on the histogram forms a jaggedness, and the moving average smooths the line. Therefore, at a minimum, you’ll want to use a two-day exponential moving average, or EMA, for the appropriate level of smoothing.

Interpreting the Force Index

In general, traders will want to buy when the two-day EMA of the force index is negative and sell when it is positive. These traders, however, should always keep in mind the overarching principle of trading in the direction of the 13-day EMA of prices. The 13-day EMA of the force index is a longer-term indicator, and, when it crosses above the centerline, the bulls are exerting the greater force. When it is negative, the bears have control of the market. Of particular importance are divergences between a 13-day EMA of force index and prices, which correspond with precise points, indicating crucial turning points of the market.

As indicated by closing prices, the difference between yesterday’s and today’s close gives the degree of the day-to-day victory of either the bulls or the bears. Similarly, the volume is added into the calculation to give a greater sense of the degree of bulls’ or bears’ victories.

What Volume and a Flattening Index Means

The volume also indicates the level of momentum in the market, as propelled by the power of either bulls or bears. Force index is one of the best indicators for combining both price and volume into a single readable figure. When force index hits a new high, a given uptrend is likely to continue. When force index hits a new low, the bears have greater strength, and the downtrend will usually sustain itself.

A flattening force index is also an important situational circumstance for traders. A flattening force index means that the observed change in prices is not supported by either rising or declining volume and that the trend is about to reverse. On the opposite side of the matter, a flattening force index could indicate a trend reversal, if a high volume corresponds with only a small move in prices.

So, this is the basic manner in which the force index can be used alone, or in conjunction with a moving average, to identify whether bulls or bears have control of the market. When volume is considered, an accurate sense of the market’s momentum may also be quickly garnered.

The Bottom Line

The force index is an indicator that can be further refined, according to whether a trader wishes to adopt a short-term or a longer-term perspective. The two-day EMA of force index mentioned above supports a whole host of additional trading rules that offer precise trend indicators for exact trading situations.

On an intermediate basis, a 13-day EMA of force index can point to the likelihood of sustained rallies or longer-term market declines, thereby generating trading rules for longer-term decision making.

(For related reading, continue to part two of this study, Triple Screen Trading System.)

Force Index

Table of Contents

Force Index

Introduction

The Force Index is an indicator that uses price and volume to assess the power behind a move or identify possible turning points. Developed by Alexander Elder, the Force Index was introduced in his classic book, Trading for a Living. According to Elder, there are three essential elements to a stock’s price movement: direction, extent and volume. The Force Index combines all three as an oscillator that fluctuates in positive and negative territory as the balance of power shifts. The Force Index can be used to reinforce the overall trend, identify playable corrections or foreshadow reversals with divergences.

Calculation

Calculation of the 1-period Force Index is straightforward. Simply subtract the prior close from the current close and multiply by volume. The Force Index for more than one day is simply an exponential moving average of the 1-period Force Index. For example, a 13-period Force Index is a 13-period EMA of the 1-period Force Index values for the last 13 periods.

Three factors affect Force Index values. First, the Force Index is positive when the current close is above the prior close. The Force Index is negative when the current close is below the prior close. Second, the extent of the move determines the volume multiplier. Bigger moves warrant larger multipliers that influence the Force Index accordingly. Small moves produce small multipliers that reduce the influence. Third, volume plays a key role. A big move on big volume produces high Force Index values. Small moves on low volume produce relatively low Force Index values. The table below shows the Force Index calculations for Pfizer (PFE). Line 27 marks the biggest move (+84 cents) and the biggest volume (162,619). This combination produces the biggest Force Index value on the table (136,600).

The chart above shows the Force Index in action. Notice how the 1-period Force Index fluctuates above/below the zero line and looks quite jagged. Elder recommends smoothing the indicator with a 13-period EMA to reduce the positive-negative crossovers. Chartists should experiment with different smoothing periods to determine what best suits their analytical needs.

Interpretation

As noted above, there are three elements to the Force Index. First, there is either a positive or negative price change. A positive price change signals that buyers were stronger than sellers, while a negative price change signals that sellers were stronger than buyers. Second, there is the extent of the price change, which is simply the current close less the prior close. The “extent” shows us just how far prices moved. A big advance shows strong buying pressure, while a big decline shows strong selling pressure. The third and final element is volume, which, according to Elder, measures commitment. Just how committed are the buyers and sellers? A big advance on heavy volume shows a strong commitment from buyers. Likewise, a big decline on heavy volume shows a strong commitment from sellers. The Force Index quantifies these three elements into one indicator that measures buying and selling pressure.

Trend Identification

The Force Index can be used to reinforce or determine the trend. Said trend, whether short-, medium- or long-term, is dependent on the Force Index parameters. While the default Force Index parameter is 13, chartists can use higher or lower numbers for more or less smoothing, respectively. The chart below shows Home Depot with 100- and 13-day Force Indexes. Notice how the 13-day Force Index is more volatile and jagged while the 100-day Force Index is smoother and crosses the zero line fewer times. In this regard, the 100-day Force Index can be used to determine the medium- or long-term trend. Notice how a resistance breakout on the price chart corresponds to a resistance breakout on the 100-day Force Index. The 100-day Force Index moved into positive territory and broke resistance in mid-February. The indicator remained positive during the entire uptrend and turned negative in mid-May. The early June support break on the price chart was confirmed with a support break in the Force Index.

Divergences

Bullish and bearish divergences can alert chartists of a potential trend change. Divergences are classic signals associated with oscillators. A bullish divergence forms when the indicator moves higher as the security moves lower. The indicator is not confirming weakness in price; this can foreshadow a bullish trend reversal. A bearish divergence forms when the indicator moves lower as the security moves higher. Even though the security is moving higher, the indicator shows underlying weakness by moving lower. This discrepancy can foreshadow a bearish trend reversal.

Confirmation is an important part of bullish and bearish divergences. Even though the divergences signal something is amiss, confirmation from the indicator or price chart is needed. A bullish divergence can be confirmed with the Force Index moving into positive territory or a resistance breakout on the price chart. A bearish divergence can be confirmed with the Force Index moving into negative territory or a support break on the price chart. Chartists can also use candlesticks, moving average crosses, pattern breaks and other forms of technical analysis for confirmation.

The chart above shows Best Buy (BBY) with the Force Index (39) sporting a series of divergences. The green lines show bullish divergences and the red lines show bearish divergences. A bullish divergence is confirmed when the Force Index (39) crosses into positive territory (green dotted lines). A bearish divergence is confirmed when the Force Index (39) crosses into negative territory (red dotted lines). Chartists can also use trend line breaks on the price chart for confirmation.

This chart shows two versions of the Force Index. The Force Index (13) captures short-term fluctuations and is more sensitive. The Force Index (39) captures medium-term fluctuations and is smoother. The 39-day Force Index produces fewer and longer-lasting zero line crossovers and these crossovers last longer. There is no right or wrong answer for these settings; it all depends on personal trading objectives, time horizon and analytical style.

Identifying Corrections

The Force Index can be used in conjunction with a trend following indicator to identify short-term corrections within that trend. A pullback from overbought levels represents a short-term correction within an uptrend. An oversold bounce represents a short-term correction within a downtrend. Yes, corrections can be up or down, depending on the direction of the bigger trend. Alexander Elder recommends using a 22-day EMA for trend identification and a 2-day Force Index to identify corrections. The trend is up when the 22-day EMA is moving higher, which means the 2-day Force Index would be used to identify short-term pullbacks for buying. The trend is down when the 22-day EMA is moving lower, which means the 2-day Force Index would be used to identify short-term bounces for selling. This is an aggressive strategy best suited for active traders. The timeframe can be adjusted by using a longer moving average and timeframe for the Force Index. For example, medium-term traders might experiment with a 100-day EMA and 10-day Force Index.

There are two schools of thought regarding the correction play. Traders can either act as soon as the correction is evident or act when there is evidence the correction has ended. Let’s look at an example with the 22-day EMA and 2-day Force Index. Keep in mind that this is designed to identify very short corrections within a bigger trend. The chart below shows Texas Instruments (TXN) with the 22-day EMA turning up in mid-September.

With the 22-day EMA rising, traders are looking for very short-term pullbacks when the 2-day Force Index turns negative. Traders can act when the Force Index turns negative or wait for it to move back into positive territory. Acting when negative may improve the reward-to-risk ratio, but the correction could extend a few more days. Waiting for the Force Index to turn positive again shows some strength that could signal the correction has ended. The green dotted lines show when the 2-day Force Index turns negative.

Conclusion

The Force Index uses both price and volume to measure buying and selling pressure. The price portion covers the trend, while the volume portion determines the intensity. At its most basic, chartists can use a long-term Force Index to confirm the underlying trend. The bulls have the edge when the 100-day Force Index is positive. The bears have the edge when the 100-day Force Index is negative. Armed with this information, traders can then look for short-term setups in harmony with the larger trend, such as bullish setups in a larger uptrend or bearish setups within a larger downtrend. As with all indicators, traders should use the Force Index in conjunction with other indicators and analysis techniques.

Using with SharpCharts

The Force Index is available as an indicator for SharpCharts. Once selected, users can place the indicator above, below or behind the underlying price plot. Placing the Force Index directly on top of the price plot accentuates the movements relative to price action of the underlying security. This can make it easier to identify bullish and bearish divergences. Chartists can click “advanced options” to add a moving average, horizontal line or another indicator to the Force Index.

Suggested Scans

Oversold in Up Trend

This scan searches for stocks where the Force Index (100) is in positive territory and the Commodity Channel Index (20) is oversold. A positive Force Index establishes an overall uptrend. An oversold CCI identifies a pullback within this uptrend. This scan is meant as a starting point. Further scrutiny and adjustment is advised.

Overbought in Down Trend

This scan searches for stocks where the Force Index (100) is in negative territory and the Commodity Channel Index (20) is overbought. A negative Force Index establishes an overall downtrend. An overbought CCI identifies a corrective bounce within this downtrend. This scan is meant as a starting point. Further scrutiny and adjustment is advised.

For more details on the syntax to use for Force Index scans, please see our Scanning Indicator Reference in the Support Center.

Further Study

Alexander Elder’s Come Into My Trading Room covers trading from A to Z. In addition to technical analysis and trading systems, readers will learn trading psychology, risk control, money management and record keeping.

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