The Force Index: A Technical Indicator

The force index is a technical indicator that measures the amount of power used to move the price of an asset. Psychologist and trader Alexander Elder introduced the term and its formula in his 1993 book Trading for a Living.

The force index has three key components: direction of price change, extent of the price change, and trading volume. When the force index is used in combination with a moving average, it can gauge significant shifts between bulls and bears. By merging the moving average with the force index, Elder enhanced the predictive capability of the force index.

Understanding the Force Index

The force index uses price and volume to calculate the strength of a price move. The force index is an oscillator, fluctuating between positive and negative values. It is unbounded, allowing the index to rise or fall indefinitely. It is used for confirming trends and breakouts, as well as identifying potential turning points by spotting divergences.

The formula is:

FI (1) = (CCP − PCP) ∗ VFI (13) = 13 – Period EMA of FI( 1)

where:

FI = Force Index

CCP = Current Close Price

PCP = Prior Close Price

VFI = Volume Force Index

EMA = Exponential Moving Average

The calculation is as follows:

• Compile the most recent closing price (current), the previous period’s closing price, and the volume for the most recent period (current volume).
• Use this data to calculate the one-period force index.
• Calculate the exponential moving average (EMA) using multiple one-period force index calculations. For instance, calculating a force index (20) requires a minimum of 20 force index (1) calculations.
• Repeat these steps at the end of each period.

A one-period force index compares the current price to a prior price and multiplies the difference by the volume over that period. The value can be positive 또는 negative. Typically, the force index is averaged over several periods, such as 13, or 100. Thus, the force index indicates whether the price has moved up or down and measures the volume or power behind the move.

High force index readings indicate strong price moves and high volume. Large price moves with low volume result in a lower force index. Since the force index helps gauge market power or force, it can effectively confirm trends 그리고 breakouts.

During strong price rallies, the force index should rise. In contrast, during pullbacks 그리고 sideways movements, the index often reverts towards zero due to smaller price moves or lower volume.

In strong declines, the force index should fall. Similarly, during bear market rallies or sideways corrections, the force index reverts towards zero as volume and price movements typically decrease.

Breakouts, such as those from chart patterns, for example, are generally confirmed by increasing volume. Since the force index accounts for both price and volume, an increase in the force index in the direction of the breakout can confirm the price breakout.

A lack of volume or non-confirmation from the force index could indicate that the breakout is likely to fail. When the above guidelines fail, it could mean a potential issue with the price/trend, indicating a potential price reversal.

For example, if the price is reaching higher highs while the force index is forming lower highs, it is called a bearish divergence. This suggests that despite the upward movement in price, the price may be due for a decline. Conversely, if the price is forming lower lows while the force index is making a higher low, it indicates a bullish divergence and there may be an upcoming price increase.

How the Force Index works

The force index is calculated by subtracting yesterday’s closing price from today’s closing price and then multiplying the result by today’s volume. If today’s closing price is higher than yesterday’s, the force is positive; if it’s lower, the force is negative. The strength of the force is determined by either a bigger change in price or volume. Both situations can independently influence the value and the change in force index.

The raw force index value is plotted as a histogram, with the centre line set to zero. A bullish market will result in a positive force index, plotted above the centre line; a bearish market points to a negative force index, below the centre line.

An unchanged market will result in a force index directly on the zero line. The raw line plotted over the day-to-day on the histogram forms a jaggedness, which is smoothed out by the moving average. Therefore, using a two-day exponential moving average at a minimum (EMA) provides the appropriate level of smoothing.

Interpreting the Force Index

Traders typically consider buying opportunities when the two-day EMA of the force index is negative, and selling opportunities when it is positive. However, traders should always keep in mind the broad principle of trading in the direction of the 13-day EMA.

The 13-day EMA of the force index is a longer-term technical indicator, reflecting market sentiment: when it crosses above the centre line, the bulls are exerting greater force, while a negative value indicates that bears have control of the market. Notably, divergences between a 13-day EMA of force index and prices often signal precise turning points in the market.

Force Index vs. Money Flow Index (MFI)

Similar to the force index, the money flow index (MFI) uses price and volume to evaluate a trend’s strength and identify potential price reversals. However, the calculations of the technical indicators differ significantly.

MFI uses a more complex formula that includes the typical price (high + low + close / 3) instead of just using closing prices. The MFI is also bound within the range of zero to 100. Due to these differences, the MFI provides different information than the force index.

Limitations of the Force Index

The force index is a lagging indicator, relying on past price and volume data to calculate an exponential moving average (EMA). Because this data is often averaged, the technical indicator may sometimes lag in providing trade signals.

For example, it may take several periods for the force index to show a rally after an upside breakout. However, by the time this occurs, the price may have already moved significantly beyond the breakout point, making it less favourable for entry.

A shorter-term force index (e.g. 10, 13, and 20) tends to create numerous whipsaws. Even minor price movements or volume increases can result in big swings in the technical indicator.

On the other hand, a longer-term force index (e.g. 50, 100, or 150) will make fewer swings but it will be slower to react to price changes and more delayed in generating trade signals.

Summary

The force index is an technical indicator that can be further modified to suit traders, whether they prefer a short-term or a longer-term approach. Using the two-day EMA of the force index provides a range of additional trading rules, offering precise trend signals for specific trading situations.

For intermediate-term 기술적 분석, using a 13-day EMA of the force index can offer insights into the potential for sustained rallies or longer-term market declines. This approach generates trading rules for longer-term decision making.

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