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The force index indicator is not as popular as some of the more well known forex technical indicators but can still be a very important trading tool when incorporated within a more complete forex trading strategy. The primary purpose of using the force index indicator is to show traders how strong the bears are during a downtrend and how strong the bulls are during an uptrend. The force index can also be used to help determine overbought or oversold zones for potential buy or sell trading signals
What is the Force Index indicator?
The force index indicator was developed by Alexander Elder. Elder’s tools have long been used by forex traders around the world. The Elder’s force index implies two uses at once – both in the short-term and in the medium-term.
This technical tool, like many others, can be combined with various indicators in the foreign exchange market. One of the most effective options for force index is compatibility with short and long term moving averages. The force index uses a short average to find possible entry and exit points, while a long one can help traders to anticipate the future direction of the trend.
The force index indicator uses the following formula for calculations:
RAW ForceIndex (i) = VOLUME (i) x (MA (Price, X, i) – MA (Price, X, i-1));
RAW ForceIndex (i) – this, respectively, is an index of the strength of the present volume;
MA (Price, X, i) is one of four moving: simple, exponential, averaged, or linearly weighted. VOLUME (i) – directly the volume of trade;
Price – price; X is the smoothing period.
The Elder’s force index indicator is a standard tool that is built-in the popular MetaTrader (MT4) trading platform which is free to download from most forex brokers. This makes the force index indicator easily accessible to traders all over the globe and of all experience levels.
How to use the Force Index indicator?
The force index indicator can give forex traders two groups of signals – a change in trend to an upward or downward direction and the strength of the trend.
Let’s start with divergence. Imagine that two lines are drawn on the forex chart. We will spot that the direction of the price and the indicator are different. The force index indicator in this case tells us that the trend is upward, but at the moment it is at the adjustment stage. This could be a good time to look for possible entry points into the market.
If you see that the direction of the price and the force index are pointing down, then we most likely have a downtrend.
The force index indicator has the following trading signals:
- Buying or selling as a new trend is forming in the market, ideally the force index indicator should be less than zero or crossing above the zero line.
- Continuation of the market trend – all the numerical indicators of the force index are increasing.
Force index trading strategy
The force index indicator can help forex traders to open a position precisely at the moments of movement against the trend, in an effort to get into a new trend at the earliest opportunity. Even Alexander Elder himself told the public that his indicator if used in medium-term trading, shows most correctly the “ruler” of the market – a bear or a bull.
If we see that the force index indicator itself is somewhere above its middle line, the trend is strong but if it is below the middle line, trend strength is weakening. But what happens if the indicator itself is located near the midline, frequently crossing it up and down? Accordingly, from here we learn that there is probably no trend now and the market may be more suited to a forex range trading strategy.
If the trend is losing force, then there are two possible scenarios:
- The price itself will continue to trend just at a slower pace
- The price itself will turn around and form a new trend in the opposite direction
- The price will get stuck in a range bound market, good conditions for forex reversal strategies.
The force index indicator can provide a quick and easy way to show a decline in trend strength. You can immediately see on the force index highs that go down, which eventually cross the middle line from top to bottom. Then we can see the slowing down of a trend.
Force Index indicator conclusion
The force index is a simple technical indicator that shows how much the price is changing relative to past prices. It is used to determine the strength of the current trend. Although the force index indicator is not as commony used as other technical indicators, it can be very useful in combination with other more complex methods of forex market analysis.
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