With various contributors to the design and implementation of indicators, Alexander Elder was among the most vibrant when it comes to the new generation types of indicators. His contribution has been recorded by the development of his force index oscillator with the objective of getting a precise analysis of the direction, length, and volume that drives the movement of the price.
In simple terms, the indicator as initially developed measures the power behind the price movement of a market. The essence of the indicator is to show the price reversals and the associated corrections through deep analysis of the direction, length, and volume. (Click this link to check when the next NFP is scheduled).
Feature of Force Index (EFI) Indicator
The following are the main features of the indicator for its application.
• Uses the variation of the price direction
• The extent of the price change is crucial in the indicator determination
• The volume of trade in the market is essential
• Mainly used to get the force/power behind price movement
Calculations and Configuration of Force Index (EFI) Indicator
In the calculation of the indicator by a trader, the indicator uses period, color selectors, and a display axis label. The periods represent the number of bases to be used during computation. The color selector represents the color to be used for graphics. The axis is for displaying the recently computed value on the Y-axis. The formula for the index is as follows:
Force Index (EFI) Indicator = (close current period – close previous period) * volume current periodElder's Force Index (EFI) Indicator | Indicator Series Click To Tweet
How the Force Index Works
During the calculation of the indicator, if today’s closing price is higher than yesterday, it’s an implication that the force is positive; otherwise, the force is negative. The overall strength of the indicator is affected greatly by a significant change in price or having a very large volume. (Try out indicators on Tradingview.com)
It is also prudent to note that each condition can influence the result of the indicator independently. In case there’s an unchanged market situation, the index will result in a zero figure.
Interpreting the Force Index
The most preferable situation for a trader is buying when there is a two-day EMA with a negative force and selling the stock when the figure is negative. As a trader, it is also prudent to note the overarching trading principle in the direction of the 13-day EMA of prices.
The period is longer-term, and when the signal crosses over the centerline, there’s an impression that the bulls are pushing more. Consequently, when negative, it’s an implication that the bears have taken over the market.
With the closing prices, comparing today’s and yesterday’s prices gives a precise degree of victory experience that is either the bulls or the bears. The addition of the volume in the mix sums to a greater extent the bulls or the bear implications as guided by the indicator. For more insight about trading, please subscribe to tradingview.com and join the conversation with other traders.