Measure the Strength of the Bulls and Bears with the Force Index Indicator

October 09, 2017 11:18 UTC
Reading time: 8 minutes

The Force Index indicator is an oscillator that attempts to gauge the strength behind price movements. It does this by looking in combination at three key pieces of market data. These are:

  1. Direction of price change;
  2. Magnitude of price change;
  3. Trading volume.

The Force Index was created by Dr Alexander Elder, who first described the indicator in his 1993 book Trading for a Living. He described the Force Index as an oscillator that measures the bullish force behind rallies and the bearish force behind declines.

Let's have a look at how he calculated it.

Calculating Bulls and Bears Force Index

We mentioned in our preamble that the Force Index measures the force behind a movement by looking at three things. Namely, the direction of the move, the distance that price has moved, and the volume at the time of the move.

If the closing price of a bar is higher than the closing price of the previous bar, then we can say that the force behind the move was positive or bullish. If the closing price is lower than the closing price of the previous bar, then the force was negative or bearish.

If the change in price is only small, then the force behind it is only small. If a price change is large, then the force is large. So, the greater the change in the price, the greater the force. Similarly, the larger the volume, the greater the force behind the move. The indicator makes an assumption that these correlations are directly proportional.

The equation used to calculate the raw Force Index is as follows:

Force Index = V x (CCURRENT - CPREVIOUS)

Where V is the volume and C is the closing price.

This raw Force Index is only of limited use, yielding a very jagged-looking histogram. Elder recommended smoothing the values using exponential moving averages to produce a more useful Force indicator. For short-term use, he recommended smoothing with a 2-day exponential moving average (EMA). For intermediate trading, he recommended smoothing with a 13-day EMA.

Elder originally proposed using end-of-day price data for the indicator, but there is no reason it cannot be applied to other time frames. As we shall see, we can also use a variety of other methods for smoothing our data than just exponential moving averages. Nor do we have to restrict the prices we use to the closing price, though close is the standard choice. Let's take a look at using the indicator in MetaTrader 4.

Using the Force Index in MetaTrader 4

The Force Index is included as one of the standard indicators that come bundled with MetaTrader 4. You'll find it listed in the Oscillators folder of MT4's Navigator, as you can see from the image below:

Depicted: MetaTrader 4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

When you double-click on Force Index, it launches the dialogue window, as shown. As you can see, the default method is a simple moving average for the smoothing over a 13-bar period, applied to the closing price. There are many alternatives to these defaults.

There are four available options for the smoothing method, and these are as follows:

  1. Simple
  2. Exponential
  3. Smoothed
  4. Linear-Weighted

There are seven choices for the type of price data used in the smoothing. These are:

  1. Close
  2. Open
  3. High
  4. Low
  5. Median of the high/low
  6. Typical price (i.e., the arithmetic mean of high, low, close)
  7. Weighted close (that is, [high + low + 2 x close]/ 4)

The image below shows the Force indicator applied to an hourly EUR/USD chart:

Depicted: EUR/USD H1 - MetaTrader 4 - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The Force Index appears below the main price chart as a histogram. How do we actually use it when trading?

Using the Force Index Indicator to Trade

The trading rules proposed by Elder revolved around combining two different moving averages of the Forex Index. The specific combination was a 2-day EMA used as a short-term signal of direction and a 13-period EMA used as a guide of the overall trend.

Elder contended that when an intermediate-length moving average of the Force Index moves to a new high, it shows bullish forces are increasing in the market. This means an uptrend is likely to keep going. Similarly, when the 13-day EMA of the Forex Index sinks to new lows, it represents increasingly bearish forces in the market.

This suggests a downtrend is likely to persist. If price changes are not supported by volume, the intermediate-length EMA of the Force Index will flatten out. This will also happen if large volumes only see small price changes. A flattening out of the Force Index in this way suggests a reversal may be near.

The 2-day EMA shows short-term ascendancy of bulls in the market when it swings above the zero centre-line. Conversely, it shows bearish forces have the upper hand when it swings below. This is used to identify useful entry points according to the indications of the trend given by the 13-day EMA. When the 13-day EMA shows an uptrend, you are looking to buy. The timing of the entry is given by the 2-day EMA swinging into negative territory, which in theory shows us a pullback that is an attractive time to buy.

When the 13-day EMA shows a downtrend, you are looking to sell. The sell signal is given by the 2-day EMA swinging above zero.

The Force indicator can also be used as a tool for gaining insights into important turning points in the market. When the 13-day EMA of the Force Index sets a new high, it confirms an uptrend (and new lows confirm a downtrend). Divergences between the 13-day EMA of the Forex Index and the price are signs that a trend may be about to break down. For example, if the market price goes to a new high, but the Force indicator only sets a lower peak, it suggests the uptrend is starting to run out of steam. Bearish forces may be about to regain the upper hand.

As you can see, the Force Index is quite a useful indicator by itself, but you should always bear in mind that no indicator is perfect. Utilising more than one indicator in combination can help mitigate the weaknesses in any one indicator and provide you with a broader view of what is happening in the market. By considering both price and volume data, the Force Index is a more comprehensive measure than many indicators, but it can still benefit from some backup help.

For example, you could use a long-term and medium-term Moving Average Indicator to confirm what the Forex Index is saying about the market trend. Or you could use a volatility band indicator, such as Keltner Channels, to provide supplementary guidance on what to expect from the market.

Though MetaTrader 4 comes with a selection of popular indicators, it's not a deeply comprehensive list. The aforementioned Keltner Channels, for example, are not available as standard. Of course, you can make separate downloads. An easy way to greatly expand the tools at your disposal with a single download is to install MetaTrader 4 Supreme Edition.

MT4SE is a free, custom plug-in developed by market professionals, and Keltner Channels is just one of the many cutting-edge tools you gain with it.

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Just important as having a sensible trading strategy and the right tools at your disposal is the ability to practise what you are doing. This is where a Demo Trading Account comes in handy. Demo trades use real market prices but are risk-free, so that you have the latitude to try out your strategies as often as you need. Then, when you are confident in what you're doing, you can go ahead and use real money.

The Force Index Indicator in Summary

The Forex Index is a quick and easy indicator that uses the price and volume information to help you make trading decisions. As we have discussed, a short-term smoothed Force Index helps single out opportune entry points. A medium-term smoothed Force Index tells us about the trend and changes in bullish and bearish forces at work in the market. If you like this article, you may also enjoy our explanation of another oscillator, the Relative Vigor Index Indicator.

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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