The Force Index is a trend-following oscillator that quantifies the movement of the market. It combines three basic elements such as the direction of movement, scale and market size. It relies on an auxiliary line to provide greater clarity so that it indicates a dominant bullish trend when the indicator remains above this line and a bearish trend when the indicator remains below.
Like all good indicators, the Force Index, has a very simple construction. This is simply to plot the slope between the last two prices and multiply the result by the volume involved. Once we have calculated the oscillator, the peaks are smoothed using an exponential moving average, because in its original form, these peaks can be very steep making it difficult to use in a trading system. The formula to calculate this indicator is the following:
Force Index(1) = {Close (current period) – Close (prior period)} x Volume
As we can see, calculation for the one period Force Index is quite simple. Just subtract the prior close price from the current close price and multiply the result by volume. The Force Index for more than one period is simply an exponential moving average (EMA) of the Force Index of 1 period. For example, a Force Index of 13 periods is a EMA of 13 periods of the 1-period Force Index values for the last 13 periods.
The raw value of force index is plotted as a histogram, with the center line set to zero.
- Force index is an indicator with high sensitivity to market changes, so when its value is positive the market shows an uptrend while if the value is negative, the predominant trend is bearish. By its nature, this oscillator detects any change in the trend, regardless of its extent and duration over time. For this feature, is recommended to use it in conjunction with another trend following indicator, so that the Force Index confirm the signals generated by the second oscillator and can be exploited in this way the best signals produced.When the line of the indicator passes the reference line from below this is an indication of a market uptrend.
- When the line of the indicator passes the reference line from above this is an indication of a market downtrend.
Normally, this indicator is smoothed with an EMA of 2 periods or an EMA of 13 periods. Both are used for different things as explained below:
The use of EMA of 2 periods
It serves to locate the entry point in our trades. If a trader is thinking about a trade in the direction of the main trend of the price, he would open a long position when the EMA 2 of Force Index is negative or else he would open a short position when the EMA 2 is in the positive side.
Sometimes, it also serves to show divergences with the price. If the higher peaks of the EMA2 fall with respect to each other, that is, if the second is less pronounced than the first, but the price keeps rising, the Force Index is warning us that the price will fall and that it is time to close our long positions. On the contrary, if lower peaks rise, that is, if the first peak is less pronounced than the second, even if the price is falling, this means that the price will soon turn upward, so it is recommended to close short positions.
The use of EMA of 13 periods:
This moving average in the Force Index represents the alternation in power between bulls and bears.
If EMA13 is above or below the zero line (reference line), that indicates that the trend is bullish or bearish. If the EMA 13 is floating around the zero line, it is an indication that we are in a market range (a market with no clear trend).
Thus, if the EMA13 form again a peak in the same zone where it was (positive or negative), that is a sign that the market trend will continue. If the EMA 13 crosses the reference line, that usually marks the end of a trend.
In addition, divergences between price and EMA13 serve to warn the trader about turns in the trend. There is a special case, which is the bullish divergence that consist in a large negative peak of EMA13 in the Force Index. When this big negative peak appears in the EMA13, it is a signal that the corresponding minimum price is going to be reached again or exceed soon. When this happens, usually, a divergence is produced with the EMA13, which can warn of a dramatic rise in the price.
Interpretation of the Force Index
The force index is one of the best indicators that combine price and volume. The indicator can be used in different ways:
- When the Force Index set new highs, the uptrend is likely to continue.
- When a new low is formed in the Force Index in a downtrend, it is a sign that this trend is strong.
- A flat Force Index also offers information. This flattening may be due to:
- Prices have not changed. If that is the case and the volume is high, it may suggest a change in the trend.
- The volume is low. A low volume in a trend also suggests a change in that trend.
- The EMA 13 is an indicator of long-term, so that if it crosses the reference line upward, the bulls have greater strength in the market and vice versa.
- One of the most important signals of this indicator are the divergences between the EMA (13) of Force Index and prices. Usually, these divergencies indicate changes in the market trend.
