The trends momentum is one of the critical parameters to assess chances for continuous one-way price action. There are lots of technical instruments to measure the momentum, but some of them are lagging or do not work in a period of high volatility when markets perform many spikes and whipsaws, changing the direction several times.
What Is the Force Index?
The Force Index has a combination of three tools, working together and confirming or denying each other to show effective entry and exit signals. Force Index 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.
The primary indicator is Force Index developed by Alexander Elder force index for trading stocks and shares initially. The latest development of technologies allowed trading platforms to adopt the indicator for a reliable work with other asset classes including currency pairs and commodities. Force Index takes into the account several parameters at the same time, calculating trading volume, the speed of the price action, and trend’s momentum based on price change compared to previous close rates. The higher volatility is, the stronger the value Force Momentum shows. At the same time, the indicator shows the trend’s direction. When prices edge higher, Force Index is positive, while it’s getting below the zero level during a downtrend. The force measures change in prices, pointing to possible accelerations or breakthroughs.
The Formula for the Force Index Is:
FI(1)=(CCP − PCP)∗VFI(13)= 13-Period EMA of FI(1) where: FI = Force index CCP = Current close price PCP = Prior close price VFI = Volume force index EMA = Exponential moving average
How to use Force index indicator?
In order to avoid false breakouts, two additional indicators are used in the system - Smoothed Moving Average with 3-bars period and traditional Stochastic oscillator to measure overbought and oversold levels, as well as to confirm the direction of the price. Smoothed Moving average is placed in the chart together with the price and a crucial moment appears when the current quote crosses the Smoothed MA line. If the action is directed above from the bottom, then two other indicators are monitored to find the best entry point for long positions. Shorts appear with the mirrored crossover.
Stochastic oscillators settings are default in terms of period, but threshold levels have to be changed as we’re looking not for overbought/oversold levels, but for strong action. The relation of 20/80 per cent has to be modified to 40/60, which will indicate confirming signal from the oscillator. The main signal comes from Force Index and it has to be above positive for long positions and negative for shorts.
Entry conditions for long positions are as follows:
- Current price bar is above Smoothed MA3;
- Stochastic oscillator’s line is above 60%;
- Force index is above 0.
Shorts are opened when the following conditions appear at the same time:
- Current price is below Smoothed MA3;
- The stochastic oscillator is below 40%;
- Force Index indicator is negative (below 0).
If you like this strategy, you might also be interested in this Chande Trend Meter
When it comes to the exit strategy, the number of pips for take-profit orders depends on asset and timeframe. In case of the EUR/USD currency pair, suggested distance to exit the market is 20-25 pips for 30-minutes timeframe, 25-30 pips for 1H, 40-60 pips for 4H, and so on. Traders should not forget about the profit/loss ration, which should not be lower than 1.5:1, while 2:1 is the best relation.
An example of Force Index Forex Trading System in action is shown on a screenshot below: