The force index is a technical indicator that measures the amount of power used to move the price of an asset. The force index uses price and volume to determine the amount of strength behind a price move. The index is an oscillator, fluctuating between positive and negative territory. It is unbounded meaning the index can go up or down indefinitely.
The force index is used for trend and breakout confirmation, as well as spotting potential turning points by looking for divergences.
The Formula for the Force Index Is:
FI(1)=(CCP − PCP)∗VFI(13) = 13-Period EMA of FI(1)
FI = Force index
CCP = Current close price
PCP = Prior close price
VFI = Volume force index
EMA = Exponential moving average
Interpreting the Force Index
In general, traders will want to buy when the two-day EMA of the force index is negative and sell when it is positive. These traders, however, should always keep in mind the overarching principle of trading in the direction of the 13-day EMA of prices. The 13-day EMA of the force index is a longer-term indicator, and, when it crosses above the centerline, the bulls are exerting the greater force. When it is negative, the bears have control of the market. Of particular importance are divergences between a 13-day EMA of force index and prices, which correspond with precise points, indicating crucial turning points of the market.
As indicated by closing prices, the difference between yesterday’s and today’s close gives the degree of the day-to-day victory of either the bulls or the bears. Similarly, the volume is added into the calculation to give a greater sense of the degree of bulls’ or bears’ victories.
- It is better to buy when the forces become minus (fall below zero) in the period of indicator increasing tendency;
- The force index signalizes the continuation of the increasing tendency when it increases to the new peak;
- The signal to sell comes when the index becomes positive during the decreasing tendency;
- The force index signalizes the Bears’ Power and continuation of the decreasing tendency when the index falls to the new depth;
- If price changes do not correlate to the corresponding changes in volume, the force indicator stays on one level, which tells you the trend is going to change soon.
- A rising force index, above zero, helps confirm rising prices.
- A falling force index, below zero, helps confirm falling prices.
- A breakout, or a spike, in the force index, helps confirm a breakout in price.
- If the force index is making lower swing highs while the price is making higher swing highs, this is bearish divergence and warns the price may soon decline.
- If the force index is making higher swing lows while the price is making lower swing lows, this is bullish divergence and warns the price may soon head higher.
- The force index is typically 13 periods but this can be adjusted based on preference. The more periods used the smoother the movements of the index, typically preferred by longer-term traders.