Force Index (FI) Indicator Explained: A Step-by-Step Guide to Mastery

Introduction to the Force Index (FI) indicator:

The Force Index (FI) is a technical indicator developed by Alexander Elder, a renowned trader, psychiatrist, and author. It was introduced to the trading community in his 1993 book “Trading for a Living.”[1] This indicator consists of a single line that fluctuates around 0 and is utilized to visualize the strength of buying or selling pressure. High positive values indicate a strong uptrend, while low negative values indicate a strong downtrend.

Calculation of the Force Index (FI)- The Formula:

The formula is as follows:

Force Index (FI) = 13-period EMA of [(Close Price  – Previous Close Price) * Volume]

The calculation begins by analyzing price data. A higher closing price compared to previous signifies a positive outcome for the security. Conversely, if today’s closing price is lower than yesterday’s, the force is generally considered negative. This price-related information is then combined with volume data, where a greater volume accompanying the price change indicates a stronger positive or negative force.[2]

Example Calculation –

1. Calculate the Price Change and Raw Force for each day:
   • Day 2: Price Change = $55 – $50 = $5, Raw Force = $5 * 200,000 = $1,000,000
   • Day 3: Price Change = $58 – $55 = $3, Raw Force = $3 * 180,000 = $540,000
   • …
   • Day 13: Price Change = $75 – $72 = $3, Raw Force = $3 * 280,000 = $840,000
2. Calculate the 13-period EMA for Raw Force:
   • Assuming the initial EMA value is $800,000
   • For Day 2: EMA = $800,000 * (12 / 14) + $1,000,000 * (2 / 14) = $857,143
   • For Day 3: EMA = $857,143 * (12 / 14) + $540,000 * (2 / 14) = $768,163
   • …
   • For Day 13: EMA = $X * (12 / 14) + $840,000 * (2 / 14)

After completing these calculations for all 13 days, you would have the Force Index (FI) values corresponding to each day. The EMA smooths out the FI values over time, offering a clearer picture of trend changes.

Interpreting the Value of Force Index (FI):

If the price consistently records higher closing values than the previous close value, accompanied by higher volume, it will be indicated by a higher FI value. Conversely, if the price consistently records lower closing values than the previous close value, accompanied by higher volume, it will be indicated by a lower FI value.

Trading strategies with the Force Index (FI):

Spotting Divergence: Divergence in trading is a signal that occurs when the price of an asset doesn’t match the movement of an indicator. It can suggest a potential trend reversal or change in market direction. There are four types of divergence.

1. Regular Bullish Divergence: This occurs when the price chart of the asset forms lower lows while the oscillator forms higher lows. This indicates that despite the downward momentum of the price, the selling strength is weakening, signaling a potential bullish reversal.
2. Regular Bearish Divergence: This takes place when the price chart of the asset forms higher highs while the oscillator forms lower highs. It indicates that despite the upward momentum of the price, the buying strength is weakening, signaling a potential bearish reversal.
3. Hidden Bullish Divergence: Bullish hidden divergence occurs when the price chart of an asset forms a higher low, while the oscillator forms a lower low. This indicates that even though the price is showing a temporary pullback or correction in an ongoing uptrend,the uptrend is likely to continue after the pullback.
4. Hidden Bearish Divergence:  Bearish hidden divergence occurs when the price chart of an asset forms a lower high, but the oscillator forms a higher high. This indicates that despite the price showing a temporary bounce or correction in an ongoing downtrend, the downtrend is likely to continue after the bounce.

Using the Force Index (FI) Indicator with TradingView:

Goto Indicators, then search for “Elder Force Index” Click on the name of indicator to insert it into chart

Limitations of the Force Index (FI):

The Force Index, a lagging indicator, utilizes past price and volume data to calculate an Exponential Moving Average (EMA). This averaging can lead to slower response times for trade signals. For instance, the Force Index might take a few periods to reflect a rally after an upside breakout, potentially missing optimal entry points. Short-term Force Index values (e.g., 10, 13, or 20 periods) generate frequent but potentially misleading signals due to their sensitivity to minor price or volume changes. Conversely, longer-term Force Index values (e.g., 50, 100, or 150 periods) offer more stable readings, yet they react slower to price shifts, leading to delayed trade signals.

References:

[1]        A. Elder, Trading for a Living: Psychology, Trading Tactics, Money Management. Wiley, 1993. Accessed: Aug. 23, 2023. [Online]. Available: https://archive.org/details/tradingforliving00elde_0

[2]        A. C. Logue, Day Trading For Dummies. Wiley, 2011. Accessed: Aug. 23, 2023. [Online]. Available: https://books.google.com/books?id=tpOdM9LsAtcC&pg=PT196

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