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Force Index Indicator is an oscillator developed by Alexander Elder to measure the strength of bulls upon growth of the price and the strength of bears upon its decline. This technical Force Index indicator considers three parameters: the direction of price, range (price fluctuations) and volume. If a Closing price of a current bar is more than a Closing price of a previous bar, the strength value is positive. If a current Closing price is lower than a previous one, the strength takes a negative value. The more amount of trades (and volume is higher) is done and the higher significance of price is, the higher the strength is.
Force Index Indicator can be used in a "raw" condition as a bar chart, but A. Elder recommends to flatten the result with Moving Average. Short MA (from 2 periods) helps to find favorable moments for entering the market. Longer MA period (for example, 13 periods) shows dominating market tendency.
Measurement of Elder Force Index:
RAW FORCE INDEX = VOLUME (i) * (CLOSE (i) - CLOSE (i - 1))
FORCE INDEX = MA (RAW FORCE INDEX, N)
where:
RAW FORCE INDEX – “raw” Force Index;
VOLUME (i) — volume of a current bar (tick volume on Forex);
CLOSE (i) - closing price of a current bar;
CLOSE (i - 1) — closing price of a previous bar;
MA - moving average (simple, exponent, smoothed or linearly weighted)
N — a smoothing period
Middle-term Force Index
According to A. Elder, 13 periods' Strength Index demonstrates dominating force on the market (bulls or bear) very well. With Force Index (13) above the middle line, bulls rule on the market, whereas Force Index is below the middle line, bears dominate. With FI dragging near the middle line and crossing it a few times, it says about absence of the market tendency. New maximum above the middle line shows that an ascending trend is confirmed. In this respect, a new lowest point below the middle line shows a descending tendency. When with growth or decline of price Force Index (13) starts giving decreasing extreme points – essentially, forming divergence/ convergence – it indicates that current trend loses its significance and a reversal is probable. In terms of graphic representation, it looks as follows:
point 1 – Force Index crosses the line of zero, which is the first sign of a descending tendency;
point 2 – Force Index accomplished a new low point below the middle line, thereby confirming a descending trend;
Falling prices are not confirmed by new descending low points on the indicator, creating bearish convergence. The trend starts gets exhausted.
point 3 – index switches to positive, which is the first sign of a breaking trend;
point 4 – a new peak above zero and above point 3, which confirms that a current bearish trend is complete.
For an ascending trend everything is quite the opposite.
Short-term Force Index
2-days' Force Index proposed by A. Elder for opening and closing positions is also noteworthy. If today's Close is more than yesterday's one, the day belongs to bulls; whereas a lower Closing price in contrast to yesterday's one means that bears won day battle. This is a very “sensitive” period, because it should only be combined in a couple with a longer period or other indicators for a determining tendency. This period was used by Elder as the entrance along a trend after a little retracement. The main rule for 2-days' Force Index is below: under the conditions of an ascending tendency and 2-days' Force Index becoming negative, we have a buying signal. Under the conditions of an ascending tendency and 2-days' Force Index becoming positive, we have a selling signal.
As an example we will take the same chart, with only Force Index (2) being actuated.
Green dotted line is the distance of a descending trend defined for a longer period of Force Index (13). The Short index, which only actuated for sales in this case gave rather good results for entrance. Also you can account for divergence/convergence for Force Index (2), on the chart above it can be found as well.
This Forex indicator is a rather strong tool for defining strength of the market. Among disadvantages we can specify only tick volume on the Forex market that does not allow Force Index to work with maximum performance and does not show genuine intensity of the market. Accounting for that, traders quite often use FI along with other tools of technical analysis. You may be also interested in:Conclusion
