The Force Index is a technical indicator used in forex trading to help identify emerging trends and confirm existing ones. This momentum oscillator measures the strength and direction of a trend, showing whether buying or selling pressure is dominating. The Force Index can be a useful tool for forex traders when used in conjunction with other indicators and analysis techniques. In this comprehensive guide, we’ll cover everything you need to know about the Force Index, including what it indicates, how to calculate it, how to analyze and interpret the results, and strategies for incorporating it into your forex trading.
What is the Force Index?
The Force Index was created in the 1990s by Alexander Elder, a renowned forex trader and author. It measures the strength and direction of a trend by factoring in both price movement and volume.
The indicator is calculated by taking the difference between the current and previous period’s close price, then multiplying that by the volume for the current period. The formula is:
Force Index = Current Period’s Close – Previous Period’s Close x Current Period’s Volume
This results in a momentum oscillator that fluctuates above and below zero. The Force Index incorporates volume into the calculation, which adds a weighted value compared to just analyzing price changes alone. Volume provides important clues into the amount of money flowing into or out of a currency pair.
The Force Index attempts to show the conviction behind a move in price. Rising prices with increasing volume shows strong buying pressure. Falling prices with increasing volume indicates strong selling pressure. Divergences between the Force Index and price can signal an impending trend change.
How the Force Index Works
The core premise behind the Force Index is that volume provides valuable insights into the intensity of buyers and sellers in a market. The direction of the Force Index shows which side controls the market – positive values indicate buyers are more aggressive, while negative values indicate sellers are dominating.
The Force Index fluctuates around a zero line. Generally, the following signals can be derived from the indicator:
- Above zero and rising – Buying pressure is intensifying, showing strength behind an uptrend
- Below zero and falling – Selling pressure is increasing, confirming a downtrend is in force
- Moves above zero – Upside momentum is accelerating, signaling potential for an uptrend
- Moves below zero – Downside momentum is accelerating, signaling potential for a downtrend
- Divergence from price – Indicates a possible trend change as price and momentum disagree
The farther the Force Index reading is away from the zero line, the stronger the signal. Movements near the zero line represent consolidations as neither buyers nor sellers are in control.
Traders look for clusters on the indicator – consecutive bars with all positive or negative values – to see momentum building. The Force Index helps confirm the strength of a trend or suggest an imminent reversal when it diverges from price.
How to Calculate the Force Index for Forex Trading
The calculation behind the Force Index is straightforward:
Current Period’s Close – Previous Period’s Close x Current Period’s Volume
- Current Period’s Close – The closing price for the current trading period (bar, candle, etc)
- Previous Period’s Close – The closing price from one period earlier
- Current Period’s Volume – The volume traded during the current period
Let’s walk through an example of how to calculate the Force Index on the EUR/USD daily chart:
- Day 1 Close: 1.2000
- Day 2 Close: 1.1975
- Day 2 Volume: 25,000
Force Index = Day 2 Close – Day 1 Close x Day 2 Volume = 1.1975 – 1.2000 x 25,000 = -25,000
A negative Force Index value shows strong selling pressure. We would plot -25,000 on the indicator for Day 2.
This process is repeated for each period – plug the close and volume into the formula to derive the Force Index value to plot.
The Force Index is then charted as an oscillator and used to gauge buying and selling pressure.
How to Use the Force Index in Forex Trading
The Force Index reveals information about emerging and existing trends that is not apparent on the price chart alone. Analysts use the indicator in a few key ways:
Confirm the strength of a trend – Rising prices with positive Force Index values validates an uptrend. Falling prices with negative values confirms a downtrend. Strong trends exhibit consecutive bars with values all on the same side of the zero line.
Identify potential reversals – The Force Index often diverges from price near key turning points. For example, the price is making new highs but the Force Index is failing to confirm with new peaks of its own. This “bearish divergence” suggests upside momentum is waning and warns a reversal may be imminent.
Gauge conviction behind breakouts – The direction of the Force Index shows whether buyers or sellers are fueling a breakout from consolidation. Index values aligned with the breakout direction helps confirm that shift in control and increase the validity of the breakout.
Assess momentum strength – The magnitude of Force Index values demonstrates how aggressively buyers or sellers are behaving. Larger positive or negative values show intensifying momentum, while readings closer to the zero line suggest consolidating markets.
Use in ranging markets – The Force Index oscillating near zero indicates a possible trading range. Traders can then look to buy near support and sell near resistance.
Spot trend weakness – A move from positive to negative Force Index values shows upside momentum is stalling. This can serve as an early warning of an impending correction even if prices are still rising.
The Force Index is best combined with other technical analysis tools. Using the indicator to confirm price signals improves the likelihood of successful trades. We’ll explore some specific trading strategies next.
Trading Strategies with the Force Index
The Force Index is versatile enough to use in most any trading approach based on trends, momentum, or confirming entry signals. Here are some examples of strategies that integrate the Force Index effectively:
Trend Trading
- Go long when the Force Index crosses above zero and price breaks above the 20-period moving average
- Exit longs when the Force Index crosses back below zero or the 20-period moving average
- Go short when the Force Index crosses below zero and price breaks below the 20-period moving average
- Cover shorts when the Force Index crosses above zero or price crosses the 20-period moving average
Range Trading
- Buy near support when Force Index is near zero showing consolidation
- Sell near resistance when Force Index is oscillating sideways under zero
Breakout Confirmation
- Look for breakouts above resistance or below support on increasing volume
- Check that Force Index aligned with breakout direction (positive for upside, negative for downside)
- Enter in breakout direction if price and Force Index confirm
Momentum Tracking
- Go long on pullbacks when Force Index remains positive, showing upside momentum intact
- Exit longs when Force Index drops below zero and momentum stalls
- Initiate shorts on rallies when Force Index is negative, signaling strong downtrend
- Cover shorts when Force Index rises above zero indicating selling pressure is subsiding
Divergence Trades
- Identify bullish/bearish divergence between price and Force Index
- Long when price makes a lower low but Force Index forms higher low – signals upside momentum building
- Short when price makes a higher high but Force Index forms lower high – warns of impending correction
The Force Index is valuable for judging strength or weakness unseen on the price chart alone. Incorporating it into an analysis workflow can boost the accuracy of entries and exits.
Optimizing Force Index Settings
The Force Index only requires setting one parameter – the number of periods used in the calculation, such as 9, 13, or 20. The optimal setting depends on your trading timeframe and style. Some guidelines for choosing the period length:
Day trading – Use shorter periods like 2-5 to gauge short term momentum. More sensitivity for capturing divergences.
Swing trading – Optimal around 9-13 periods. Enough data to smooth out short term noise and identify longer trends.
Position trading – Look at longer terms such as 20 or 50 to focus on main trend direction. Less signals generated overall.
Range trading – Shorter periods like 5-10 work well for identifying oscillator moves toward overbought/oversold.
Volatility environment – Increase period length in quieter markets. Shorten length during active volatility.
Experiment to see which period setting best fits your trading approach. You may also look at multiple Force Index calculations on the same chart with different settings.
Force Index vs. Other Oscillators
The Force Index demonstrates similarities with other volume-based momentum oscillators that traders may be familiar with. Let’s compare it to two popular indicators – the Money Flow Index (MFI) and the Volume-weighted Moving Average (VWMA):
Money Flow Index
- Incorporates volume and mimics RSI in scale of 0-100
- Does not factor in price changes, just raw volume and money flow
- Less sensitive to minor pullbacks or volatility
Volume-weighted Moving Average
- Acts as an moving average weighted to volume data
- Smooths data to show overall directional bias in volume
- Slower moving with less definitive buy/sell signals
Force Index
- Most directly keys off relationship between price and volume
- Rapidly responsive to changes in trend, momentum and conviction
- Clearer signals aligned with prevailing price move
The Force Index tends to provide earlier and more actionable signals regarding emerging and fading momentum based on its sensitivity. It may be prone to more whipsaws compared to less reactive indicators like MFI though.
Using the Force Index in Day Trading
The Force Index is well-suited for short term trading ranging from scalping to day trading. On intraday time frames, the Force Index helps evaluate breakouts, measure pullback strength, and confirm intraday swing points.
Here are some best practices for effectively applying the Force Index to intraday trading:
- Use shorter time frames from 1-minute to 60-minute charts
- Set the Force Index calculation between 2-10 periods to detect rapid momentum shifts
- Look for divergence at short term overbought/oversold levels
- Focus on periods with sustained directional Force Index values and higher volume
- Be nimble taking profits – For scalping use a 1:1 risk reward ratio
- For day trading use wider stops up to 2:1 reward/risk or let winners run until Force Index turns
- Closely monitor price action at key levels – Use Force Index for confirmation
- Favor trades in the overall daily trend direction as shown on higher time frames
The Force Index excels at gauging intraday momentum and confirming dynamic price swings typical of short term trading. Use it to validate your readings of order flow and market internals.
Pitfalls to Avoid When Using the Force Index
While the Force Index can certainly enhance analysis, traders should be aware of some nuances and drawbacks of the indicator:
- Prone to whipsaws and false signals – Use other indicators to confirm
- Can stay overbought or oversold for extended periods – Don’t anticipate reversals too early
- Volume data less reliable in forex compared to equities – Use exchange volume if possible
- Lagging by one period since based on prior close and volume
- Open gaps can distort signals – Make sure to fill in gaps on chart
- Choppy trading ranges keep Force Index near zero – Wait for breakout confirmation
- Not ideal for very long term trends – Best for short to medium-term trading
- Settings like period length can significantly alter signals – Optimize for your strategy
- Works best when combined with price action analysis methods
Avoid making trading decisions solely based on Force Index signals. Use the indicator more for validating price moves and assessing momentum conviction.
Tips and Tricks for Trading with the Force Index
Mastering usage of the Force Index takes practice like any indicator. Here are some tips for getting the most out of the Force Index:
- Look at longer time frames to define the major trend direction for context
- Use on shorter time frames (15min, 60min) to anticipate imminent reversals
- For key levels or chart points, check that Force Index aligns with price
- Measure swings from peak to trough or vice versa – Bigger moves show strength
- Note bars with outsized volume – May drive momentum even if price move is small
- Check multiple timeframes – What shows a extreme reading on a short timeframe may not on the long term chart
- Compare Force Index movements on different instruments to see if they confirm each other
- Divide Force Index by volume for a relative strength measure comparable across currency pairs
Like all leading indicators, the Force Index is not meant to be used in isolation. Combine it with trendlines, support/resistance, candlestick patterns, and other tools for a robust trading approach.
Conclusion
The Force Index shines at assessing the underlying strength and directional conviction behind market moves. By factoring in volume, the indicator provides powerful insights unavailable on the price chart alone. Traders can confirm emerging trends, identify imminent reversals, gauge breakout validity, and measure pullback intensity using the Force Index.
When integrated as part of a complete trading plan, the Force Index serves as an objective second opinion on momentum. However, like all leading indicators it is prone to false signals. Use price action context and other confirming indicators to validate Force Index readings. With practice, traders can learn to properly interpret Force Index signals for more accurate trend analysis and timely trade triggers.
