Force Index

What Is the Force Index?

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

Understanding the Force Index

The force index utilizes price and volume to determine the amount of strength behind a price move. The index is a oscillator, fluctuating among a positive and negative area. It is unbounded meaning the index can go up or down endlessly. It is utilized for trend and breakout confirmation, as well as spotting potential defining moments by searching for divergences.

The formula is:
$\begin &\text\left(1\right)=\left(\text-\text\right)*\text\left(13\right)=\ &\text{13-Period EMA of FI}\left(1\right)\ &\textbf\ &\text\ &\text\ &\text\ &\text\ &\text\ \end$
The calculation is as follows:

1. Arrange the latest closing price (current), the prior period's closing price, and the volume for the latest period (current volume).
2. Compute the one-period force index utilizing this data.
3. Compute the exponential moving average utilizing various one-period force index calculations. For instance, computing a force index (20) will expect no less than 20 force index (1) calculations.
4. Persistently repeat the means after every period closes.

A one-period force index is contrasting the current price with a prior price and afterward increasing that by volume over that period. The value can be positive or negative. Normally the force index is averaged more than several periods, like 13, or 100. Consequently, the force index tells whether the price has gained more headway upwards or downwards, and furthermore how much volume or power is behind the move.

High force index readings are associated with exceptionally strong price moves and extremely high volume. Large price moves that lack volume will bring about a force index that isn't as high or low (compared to assuming the volume was large). Since the force index assists with measuring market power or force, it very well may be utilized to assist with affirming trends and breakouts.

Strong assemblies in price ought to likewise see the force index rise. During pullbacks and sideways developments, the force index will frequently fall on the grounds that the volume and additionally the size of the price moves gets more modest.

During strong declines, the force index ought to fall. During bear market rallies or sideways revisions, the force index will level off or climb in light of the fact that the volume and the size of the price moves regularly taper off.

Breakouts, from a chart pattern, for instance, are typically confirmed by expanding volume. Since the force index factors for both price and volume, a force index spike toward the breakout can assist with affirming the price breakout. Lack of volume, or non-confirmation, from the force index, could mean the breakout is bound to fail.

At the point when the above rules fail that might demonstrate a problem with the price/trend, and thusly a potential price reversal. For instance, assuming the price is making higher highs however the force index is making lower highs, that is called a bearish divergence and the price might be due for a decline. Assuming that the price is making lower lows and the force index is making a higher low, that is a bullish divergence and the price may before long rise.

Force Index versus Money Flow Index (MFI)

The money flow index (MFI), like the force index, utilizes price and volume to assist with surveying the strength of a trend and spot potential price reversals. The calculations of the indicators are very unique, however, with MFI utilizing a more complex formula that incorporates the normal price (high + low + close/3) rather than just utilizing closing prices. The MFI is likewise bound somewhere in the range of zero and 100. Since the MFI is bound and uses an alternate calculation, it will give unexpected data in comparison to the force index.

Force Index Limitations

The force index is a lagging indicator. It is utilizing prior price and volume data, and afterward that data is utilized to work out an average (EMA). Since the data is ordinarily put into an average, it might now and again be slow to give trade signals. For instance, it might take several periods for the force index to begin mobilizing after an upside breakout, however at this point the price might have proactively moved fundamentally past the breakout point and may hence never again justify an entry.

A more limited term force index (10, 13, and 20 for instance) makes a ton of whipsaws, as even moderate price moves or volume increments can cause big swings in the indicator. A more extended term force index (50, 100, or 150 for instance) won't make as many swings, yet it will be slower to respond to price changes and will be more delayed in giving trade signals.

Highlights

• On the off chance that the force index is making higher swing lows while the price is making lower swing lows, this is bullish divergence and cautions the price may before long head higher.
• A falling force index, below zero, affirms falling prices.
• Assuming the force index is making lower swing highs while the price is making higher swing highs, this is bearish divergence and cautions the price may before long decline.
• A breakout, or a spike, in the force index, affirms a breakout in price.
• A rising force index, over zero, affirms rising prices.
• The force index is commonly 13 periods however this can be adjusted in view of preference. The more periods utilized the smoother the developments of the index, ordinarily preferred by longer-term traders.