What is the Force Index?
The force index is a technical indicator that measures the amount of power used to move the price of an asset. The term and its formula were developed by psychologist and trader Alexander Elder and published in his 1993 book Trading for a Living. 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.
- 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.
The Formula for the Force Index is
Force Index(1)=(Current Close Price - Prior Close Price)∗Volume Force Index(13)=13 Period EMA of Force Index(1)Where:EMA = exponential moving average
How to Calculate the Force Index
- Compile the most recent closing price (current), the prior period's closing price, and the volume for the most recent period (current volume).
- Calculate the one-period force index using this data.
- Calculate the exponential moving average using multiple one-period force index calculations. For example, to calculate a force index (20) will require at least 20 force index (1) calculations.
- Continually repeat the steps after each period ends.
What the Force Index Tells You
A one-period force index is comparing the current price to a prior price and then multiplying that by volume over that period. The value can be positive or negative. Typically the force index is averaged over several periods, such as 13, or 100. Therefore, the force index tells whether the price has made more progress upwards or downwards, and also how much volume or power is behind the move.
High force index readings are associated with very strong price moves and very high volume. Large price moves that lack volume will result in a force index that is not as high or low (compared to if the volume was large).
Because the force index helps to gauge market power or force, it can be used to help confirm trends and breakouts.
Strong rallies in price should also see the force index rise. During pullbacks and sideways movements, the force index will often fall because the volume and/or the size of the price moves gets smaller.
During strong declines, the force index should fall. During bear market rallies or sideways corrections, the force index will level off or move up because the volume and the size of the price moves typically taper off.
Breakouts, from a chart pattern, for example, are usually confirmed by increasing volume. Since the force index factors for both price and volume, a force index spike in the direction of the breakout can help confirm the price breakout. Lack of volume, or non-confirmation, from the force index could mean the breakout is more likely to fail.
When the above guidelines fail that may indicate a problem with the price/trend, and therefore a potential price reversal. For example, if the price is making higher highs but force index is making lower highs, that is called a bearish divergence and the price may be due for a decline. If the price is making lower lows and the force index is making a higher low, that is a bullish divergence and the price may soon rise.
The Difference Between the Force Index and the Money Flow Index (MFI)
The money flow index (MFI), like the force index, uses price and volume to help assess the strength of a trend and spot potential price reversals. The calculations of the indicators are quite different, though, with MFI using a more complex formula which includes the typical price (high + low + close / 3) instead of just using closing prices. The MFI is also bound between zero and 100. Because the MFI is bound and uses a different calculation, it will provide different information than the force index.
Limitations of Using the Force Index
The force index is a lagging indicator. It is using prior price and volume data, and then that data is used to calculate an average (EMA). Because the data is typically put into an average, it may sometimes be slow to provide trade signals. For example, it may take a couple of periods for the force index to start rallying after an upside breakout, but by this time the price may have already moved significantly beyond the breakout point and may thus no longer justify an entry.
A shorter-term force index (10, 13, and 20 for example) creates a lot of whipsaws, as even moderate price moves or volume increase can cause big swings in the indicator. A longer-term force index (50, 100, or 150 for example) won't make as many swings, but it will be slower to react to price changes and will be more delayed in providing trade signals.