Force Index

Definition:

The Force Index technical indicator was originated by Dr Alexander Elder. He published detailed rules for calculating and using this indicator in his book Trading For a Living.

In general, the force behind each price movement can be characterized by a direction, a movement size and a volume level. This force will be positive if the current bar’s close is above that of the previous bar. If it is lower, then the force has a negative sign.

Basically, the larger the movement from close to close, the higher the market’s force is. Also, the force also increases with higher trading volume.

Furthermore, since the Forex Index tends to swing considerably, traders often smooth out the data using a moving average that can be a simple, weighted or exponential moving average of the closing prices.

A common technique involves using 2 and 13-day exponential moving average to assess the strength of the short and medium-term trends respectively.

Sample Chart:

Usage:

In practice, the Forex Index helps traders gauge the strength and direction of the prevailing trend. For example, some traders use the slope of the 13-day EMA Force Index to indicate the direction of the trend.

Furthermore, when the Forex Index is greater than zero, that indicates the trend is upwards, and when below zero, the trend is downwards. Nevertheless, when the Forex Index trades undecidedly around its zero point, this indicates a lack of trend in the market.

In terms of trading signals, traders might use the indicator to go long when the Force Index was under zero and bullish divergence appeared relative to the price. This means that the price makes new lows, but the Forex Index fails to do so.

Conversely, traders might go short when the Force Index was over zero and bearish divergence appeared relative to the price. This means that the price makes new highs, but the Index fails to do so.

Calculation Method:

Define:

• n = the number of the time period bar in question.
• N = the period of the smoothing using a moving average.
• Close(n) = The closing price at the end of time period n.
• Volume(n)= The volume traded during time period n.
• SMA(A,B) = Simple Moving Average of data item A over B periods.
• Forex Index (n)= The value of the Forex Index Indicator at time period n.

Calculate:

• Basic Force Index- Force Index(n) = [Close(n) – Close(n-1)] * Volume(n)
• Simple Smoothed Force Index- Force Index(n) = [SMA(Close(n), N) – SMA(Close(n-1), N)] * Volume(n)

Practice Force Index Trading

Technical analysis with Force Index is a demanding skill that requires practice to master. We recommend that you use a demo account to train yourself for free before applying your skills to real money trading.
Most reputale trading platforms today (for example: GFC Trader, AVA Trader, Meta Trader) feature technical indicator functions which can be applied on real-time charts. You can open a free account, download the trading software and start sharpening your technical analysis skills today!

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