An oscillating technical indicator that attempts to measure the “force” behind moves based on its direction, distance, and trading volume.
Overview
Developed by Dr. Alexander Elder and described in his book “Trading for a Living”, the Force Index “measures the force of bulls behind every rally and of bears behind every decline”. The Force Index attempts to quantify the force of every price move according to its direction, distance, and trading volume. The Force Index can be calculated by the formula:
FI = today’s Volume multiplied by (today’s Close price minus yesterday’s Close price)
The resulting Force Index is then smoothed by a moving average for best results. Elder suggests that smoothing the Force Index with a shorter moving average (he recommends 2 periods) is useful for finding entry and exit points in the market while smoothing with a longer moving average (he recommends 13 periods) better reveals major changes in the force of bulls and bears.
The Force Index on the EUR/GBP 4H Chart 4/12/2011
Source: VT Trader
Interpretation
While using a minimal degree of Force Index smoothing (2 periods), Elder recommends using an exponential moving average’s slope to determine the market trend direction and buying when the Force Index turns negative (during an uptrend) and selling when the Force Index turns positive (during a downtrend).
While using a moderate degree of Force Index smoothing (13 periods), Elder describes the best buy signals as being when bullish divergence occurs between the Force Index and price (i.e. lower lows in price and higher lows in the Force Index) and the best sell signals as being when bearish divergence occurs between the Force Index and price (i.e. higher highs in price and lower highs in the Force Index).
