What Is the Force Index?
Dr. Alexander Elder has contributed to the development of a new generation of technical indicators. His force index is an oscillator that quantifies the force, or strength, of bulls driving certain market rises and bears driving every downturn.
The direction of price movement, the magnitude of price change, and the trading volume are the three essential components of the force index. When the force index is used with a moving average, the resultant figure may properly detect substantial changes in bull and bear strength. Elder has coupled a highly valuable single indicator, the moving average, with his force index for even greater predicted performance.
- The force index is a technical indicator that quantifies the amount of power needed to influence an asset’s price.
- A one-period force index compares the current price to a past price and then multiplies the difference by volume throughout that time.
- Large force index values are related with large price movements and high volume. Large price changes with little volume will result in a force index that is neither too high nor too low.
How the Force Index Works
Subtracting yesterday’s close from today’s close and multiplying the result by today’s volume yields the force index. If today’s closing prices are higher than yesterday’s, the force is positive. If yesterday’s closing prices are lower than today’s, the force is negative. A bigger change in price or a higher volume determines the strength of the force; each condition may independently impact the value and the change in force index.
The force index raw value is presented as a histogram, with the midline set to zero. A rising market indicates a positive force index displayed above the midline; a falling market indicates a negative force index drawn below the centerline. A market that remains unaltered will provide a force index that is squarely on the zero line. The raw line on the histogram that is displayed over the day-to-day create a jaggedness, and the moving average smooths the line. As a result, for the required degree of smoothing, you should use a two-day exponential moving average, or EMA.
Interpreting the Force Index
In general, traders should purchase when the force index’s two-day EMA is negative and sell when it is positive. However, these traders must constantly remember the overall notion of trading in the direction of the 13-day EMA of prices. The force index’s 13-day EMA is a longer-term indication, and when it crosses above the midline, the bulls are in control. When it is negative, the bears dominate the market. Divergences between a 13-day EMA of the force index and prices, which correlate with exact points, indicate critical market turning moments.
The difference between yesterday’s and today’s close, as represented by closing prices, indicates the degree of the bulls’ or bears’ day-to-day success. Similarly, volume is included into the computation to provide a more accurate picture of the degree of bulls’ or bears’ successes.
What Volume and a Flattening Index Means
Volume also represents the amount of market momentum, as determined by the strength of bulls or bears. One of the greatest indicators for merging price and volume into a single comprehensible number is the force index. When the force index reaches a new high, the upswing is expected to continue. When the force index reaches a new low, the bears gain strength, and the decline generally continues.
For traders, a flattening force index is also an essential situational scenario. A flattening force index indicates that the observed price change is not supported by growing or falling volume and that the trend is set to reverse. On the other hand, a flattening force index might imply a trend reversal if high volume correlates to just a little price change.
So, this is how the force index may be used alone or in combination with a moving average to determine whether bulls or bears are in control of the market. When volume is taken into account, an accurate picture of the market’s momentum may be swiftly obtained.
The Bottom Line
The force index is an indicator that may be modified depending on whether a trader prefers a short-term or long-term view. The above-mentioned two-day EMA of force index enables a plethora of different trading rules that provide accurate trend indications for certain trading scenarios.
A 13-day EMA of force index might indicate the potential of prolonged rallies or longer-term market losses on an intermediate basis, producing trading rules for longer-term decision making.
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