What is the 'Force Index'

Force index is a numerical measure of the market power of a movement in the price of a stock. The term and its formula were developed by psychologist and trader Alexander Elder in a 1993 book.

BREAKING DOWN 'Force Index'

The force index measures the market power behind movement in the price of a stock. The index’s value can be positive or negative, depending on the upward or downward movement in the share price. The formula requires three inputs: the stock’s closing price at the end of a period, the closing price at the end of the previous period and the trading volume during the period. The resulting index value can be positive or negative, and can be used by traders to signal or confirm trends and price corrections. Analysts often use the force index in conjunction with the moving average to formulate predictions for a stock’s future performance.

Alexander Elder introduced the force index in his 1993 book,Trading for a Living. To calculate the index for one-day period, Elder developed the following formula:

Force Index = (Current period close - Previous period close) x (Current period volume)

The formula above uses end-of-day prices to track movement, but this formula can be adjusted to cover any period of time. Day traders have used the index to analyze a stock’s movement over a period of hours. Elder recommended a 13-day period to minimize the variability of the force index over a shorter period. To further account for day-to-day spikes in the index, Elder suggested coupling it with the exponential moving average over that same period to most effectively smooth the upward and downward swings over a particular time period.

How Traders Use the Force Index

Traders often look for divergence of the force index and the movement of a stock price. Such a separation can be a signal of an imminent reversal in the movement of that price. A period in which share price declines but the force index moves higher suggest a bullish turn is approaching. A period of price increase but weakening force index hints at a bearish trend.

The force index is one of many indicators that traders use for predictive analysis, and it is best accompanied by other supporting measures to confirm or challenge conclusions reached from the force index alone. Envelope channels come in several varieties, but are generally charting tools that draw from exponential moving averages that alert traders to buying or selling opportunities. Convergence between indicators such as envelope channels and the force index provides traders with a strong signal to take market action.

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