A TOOL WINNERS USE
“One of the most fascinating benefits of trading is that there are many helpful analytic tools that can be used in making informed trading decisions.”
Hello:
The Force Index was developed by Dr. Alexander Elder (who was quoted copiously in my past articles), and presented in his book Trading for a Living.
The Force Index (FI) is an indicator used in technical analysis to illustrate how strong the actual buying or selling pressure is. It focuses on three key pieces of market information - price change, extent of price change and trading volume. The force of every move is defined by its direction, distance, and volume. If prices close higher, the force is positive, if lower, then negative. The greater the change in prices, the greater the force; the greater the volume, the greater the force. That is the simple but powerful concept behind Force Index, and the basic manner in which force index can be used alone or in conjunction with a moving average to identify whether bulls or bears have control of the market. When volume is considered, an accurate sense of the market's momentum may also be quickly garnered. Force index is an indicator that can be further refined according to whether a trader wishes to adopt a short-term or a longer-term perspective. The two-day EMA of force index mentioned above supports a whole host of additional trading rules that offer precise trend indicators for exact trading situations. On an intermediate basis, a 13-day EMA of force index can point to the likelihood of sustained rallies or longer-term market declines, thereby generating trading rules for longer-term decision making.
The force index is calculated by subtracting yesterday's close from today's close and multiplying the result by today's volume. Force Index = (Today's Closing Price - Yesterday's Closing Price) * Today's Volume. If closing prices are higher today than yesterday, the force is positive. If closing prices are lower than yesterday's, the force is negative. And the strength of the force is determined either by a larger change in price or a larger volume - either situation can independently influence the value and the change in force index.
When using the indicator, it’s necessary to bear in mind the points below:
§ 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 trough;
§ 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.
In addition to the hints above, digging deeper into the characteristics of the FI shows that a flattening force index is also an important situational circumstance for traders. A flattening force index means that the observed change in prices is not supported by either rising or declining volume and that the trend is about to reverse. On the opposite side of the matter, a flattening force index could indicate a trend reversal if a high volume corresponds with only a small move in prices.
Please don’t forget that the higher the positive reading on the Force index, the stronger is the bulls' power. On the other hand, the lower the negative reading, it signals the strength of the bears. So for example, if Force index flattens out during a bullish move, it indicates that either (a) volumes are falling or (b) large volumes have failed to significantly move prices. Both are likely to precede a reversal.
I’d like you to be reminded that, though the FI is a tool some winners use, it’s no Holy Grail. Any trader who doesn’t make use of a safe and sound position sizing strategy in her/his trading activity has already prepared a recipe for pecuniary ruin.
One trading expert who’s successful with this great indicator concludes: “I regard the Force Index as one of the market's best kept secrets. To my mind this is the only credible attempt at combining both price and volume into one index. "On balance Volume" comes close; however, while it takes into account the direction of price movement, it does not incorporate the magnitude of price changes, and so, in my humble opinion, is decidedly inferior to the Force Index in its predictive power… I believe this combination of price and volume is important because while prices can lie and be subject to all kinds of games in this age of computerized trading, volume cannot lie - if it is there (or not there), then it means it is there (or not there). That to me is one of the few things I can hang my hat on in the …market.”
NB: Please watch out for my coming articles with these titles: ‘Worst-case Scenarios’, ‘Effective Swing Trading in Forex’, ‘Advanced Gap Trading’, ‘Resist the Lure of High Risk (Part 2).’ ‘3 Recent Gap Trades,’ ‘Trading for a Livelihood,’ ‘Another Way of Using the Williams’ Percentage Range,’ ‘If I Were a Trading Neophyte…,’ The True Holy Grail,’ ‘Monthly Trading Report,’ etc.
Your questions and opinions are highly welcome.
Thank you.
With best regards,
Azeez Mustapha
Forex Signals Strategist, Funds Manager &Coach
Senior Analyst
FX Instructor, LLC
Email: amustapha@fxinstructor.com
Yahoo! Messenger ID: saazalmu
Are you facing any challenges in trading? You might want to explore the secrets of markets wizards and duplicate their success. Get the secrets from my past articles at:
www.fxinstructor.com/blog/author/amustapha
Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal
And my past articles are also available at: www.ituglobalforex.blogspot.com
NB: There is risk of loss in trading, but it is possible to be a successful trader.
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