Force index is a technical indicator that uses prices and volume movements to show turning points in markets. The force indicator was developed by Alexander Elder, which was also documented in his book Trading for a Living. The main objective of the indicator is to gauge the strength associated with price movements. Traders apply the oscillator to confirm breakout and trends as well as identifying potential turning points.
Features of force index indicator
As the indicator attempts to determine the strength of price movements, its key elements include the following market data pieces. (Try out indicators on Tradingview.com)
• Price change direction
• Trading volume
• The magnitude of the price movement
The force index applies both short and long smooth setting for the following:
• Important price reversals confirmation
• Price trends confirmation
• Entry and exit points
Calculation of the force index indicator
Calculation of the force index is simple and direct with the following formula:
Force Index (X) = Volume * (Ccurrent period- Cprevious period)
Where C is the closing price
Force Index Indicator Click To TweetInterpretation of Force Index
Force index of one period compares the current market price to the previous one. It then multiplies by the volume over that period where the value can either be positive or negative. Traders using the force index indicator can identify whether the price progress is either downwards or upwards and the power or volume behind the move.
If the result is high index reading, it is an indication that the price movement is very strong with high volume. Strong price movement with less volume results in a force index that is neither low nor high. When the force index falls, it is an indication that it is a strong price decline. In the case of sideways corrections, the force index moves up due to the size and the volume of the Price tapering.
Applications of Force index Indicator
• It is used to gauge market power and hence confirming c trends and breakouts.
• Helps to identify price reversal
• It helps to confirm the price breakout
Comparison Between the Force Index and the Money Flow Index (MFI)
Both the force index and Money flow index use prices and volumes to identify the strength of a trend and spot potential price reversals. The major difference between the two is the calculation aspect, where the money flow index is quite complex. The Money Flow Index Typical Price is calculated using the following formula: Typical Price = (High + Low + Close)/3 instead of using the closing formulas.
For this and more insight about trading, please subscribe to tradingview.com and learn more from different traders that will sharpen your trading skills.