The Force Index oscillator uses price movement and volume to work out how strong particular price movements are to identify possible reversal points in the market.
The Force Index oscillator is sometimes just called ‘the index’, and it’s the brainchild of Alexander Elder who also came up with his namesake Elder Ray Index.
Calculating the Force Index
This formula is for a 1-period Force Index:
Force Index (x) = [Close (present period) – Close (previous period)] x Volume
The Force Index is an exponential moving average tool that takes into consideration previous data points from the formula above. The indicator works out an average of these consecutive values. With this kind of moving average, newer data points carry greater influence than more historic ones. In the general form the indicator is worked out in this way:
Force Index (n) = n-period exponential moving average of Force Index (x)
A 13-period exponential moving average was Alexander Elder’s recommendation, and it just so happens that this is the standard value used on charting software, but you are free to alter it to whatever period you prefer.
As with the Elder Ray Index, the indicator uses daily-level data, so can only use it with timelines of a day or longer. Anything shorter than that won’t give you any meaningful information.
What period setting you go with will depend on your particular trading style. If you typically hold trades for just a few days, you might be fine going with the 13-period duration setting. For anything longer you’ll be looking at settings of 50, 100 or maybe more points to get the results you’re after.
Force Index Uses
The Force Index crosses over and under the zero line. When it’s above it that indicates an upward trend, while below it signals the opposite. It’s thought to be a signal that a change in the trend is on the horizon when index and price part ways.
If you use a longer duration period with this oscillator you won’t get so many dramatic peaks and troughs and the line should generally be steadier. A short duration period will give you lots of them, and this can be helpful when you’re looking at price over a couple of hours, for instance. The downside is that it can also give you lots more unhelpful false signals. So, a longer period won’t give you so many signals while a shorter period will.
The force index can be useful because it can give you clues about changes to do with volume that you won’t get from looking at the price on its own.
If the indicator and price are going in separate directions you might be looking at possible reversals in the near future.
For instance, if price heads upwards and the index sees a tumble, this could be a sign of a weakening uptrend and an imminent reversal. And if price is heading down while the index is moving up that could be a clue that points to a weakening downtrend and a likely upcoming reversal.
Don’t get too carried away at every divergence you see though. Just because price and index aren’t shadowing each other doesn’t always mean you should place a trade. Sometimes they can quite naturally move apart for a long time, so if something like this does happen you should look to other indicators to refine your assessment of what’s going on.
You could try an EMA set to the same period, so if your force index is set at a 23-period you could filter trade signals with a 23-period EMA as well. You would then take trades in the trend’s general direction depending on which way the moving average slope is heading, and possibly other clues from price action or candlestick patterns.
Examples of The Force Index
A trader could put in place a rules-based system for taking Force Index trades grounded by the following:
1) Force Index increasing or index EMA positively sloped
2) EMA of price positively sloped
3) Trade exited when EMA goes neutral or Force Index < 0
1) Force Index decreasing or index EMA negatively sloped
2) EMA of price negatively sloped
3) Trade exited when EMA goes neutral or Force Index > 0
The Force Index is a useful tool that can help to show you which way price might go according to volume. Although it’s an oscillator, it’s not meant to point out “overbought” and “oversold” levels. It’s more of a trend following indicator.
Use it for the daily chart and longer periods because you obviously won’t get inputs like daily high and daily low from anything shorter than a day.
Traders who hold positions for weeks or months should be going over 50 periods. Those who hold positions just days might be better off with fewer than 20 periods.
As with all indicators, use the force index in conjunction with others to give you more data touchpoints and thus a more rounded view of what’s going on in the market before you commit to a trade.