The Elder Force Index is an indicator that uses price and volume to assess the power of a move or vary in turning points. It is developed by the veteran trader Alexander Elder. It was introduced in Alexander Elder’s classic book, Trading for a Living: Psychology, Trading Tactics, Money Management (Wiley Finance). The Force Index has three essential elements: direction, extent, and volume of a stock’s price movement. This indicator can be used to reinforce the overall trend, identify playable corrections, or foreshadow reversals with divergences.
The indicator not only reflects the market trend but also identifies the divergence situation. Here, after describing the features and calculation method of the indicator, we will go for examples from different broker software platforms.
What is Elder Force Index?
The Elder Force Index belongs to the oscillator family of technical analysis. The indicator measures the force of the bear and bull market. It fluctuates between positive and negative territory and indicates the upcoming market situation. There are three major elements to a stock’s price movement that are direction, extent, and volume. These factors are described below.
What are the Factors of the Elder Force Index Indicator?
There are three factors in Elder Force Index values.
- First, the indicator is positive when the current close is above the prior close. The indicator is negative when the current close is below the prior close.
- Another, the extent of the move determines the volume multiplier. Bigger moves warrant larger multipliers that influence the Force Index accordingly.
- The third and final element is volume, which, according to Elder, measures commitment. Volume plays a key role, a big move on big volume produces high Force Index values. Small moves on low volume produce relatively low Force Index values.
- The advantage of the heavy volume is a strong commitment from buyers and sellers.
The Force Index quantifies these three elements into one indicator that measures buying and selling pressure.
How does it Calculate?
The calculation method is quite straightforward. In order to calculate the Elder Force Index, subtract yesterday’s close price from today’s close and multiply the outcome by today’s volume.
(Yesterday’s close – Today’s close) x Today’s Volume
The force is positive if today’s closing price is higher than yesterday’s. On the other hand, if today’s closing price is low, the force is negative. Hence, the force strength is determined by the large scale of price change or volume.
What is the Process of Setting up the Elder Force Index Indicator on Charts?
Now, come straight to the practical part of the content. Here, I’ll guide you step-by-step on how you can place the indicator on different charting and trading platforms. So, let’s start with Zerodha kite, then we will move to Upstox Pro.
Setting up Charts on Zerodha Kite
This indicator is available in the STUDIES section in Zerodha Kite.
See the above image. Traders can use the indicator to reinforce or determine the trend. The Elder Force Index indicator’s default parameter is 13. You can even change the color by clicking on the result section. Here, the default color is white.
Setting up Charts on Upstox Pro
Previously, an example was given on the Zerodha kite platform. Now, let’s have a quick look at another example, taken from the Upstox Pro trading table. The attachment is given below:
The above attachment is from the Upstox trading platform. The input procedure is quite easy. You can search your preferred script from the above search options. Like here, I add a script of AXISBANK. After adding a script go for indicator options.
On the same row, you will get a time limit, indicator, and chart pattern options. Through the indicator section, you can add the indicator.
Basic and Advanced Trading Rules of the Indicator
After lots of analysis, we’ve successfully sorted out some of the best profit-making rules or strategies of the indicator. I place those strategies in two sections, one is for new traders and the other one is for advanced traders.
Basic Trading Rules
- When the indicator goes above 0 levels, the market is bullish.
- On the opposite side, If the elder goes below 0 levels, the market is bearish.
- It is advisable to buy the stock below zero and sell it above zero.
- For the short term, I use the 1-week time limit and Elder indicator period at 13.
- And, for longer-term trends, one can use a 100-day Force Index instead of a 13-day Force Index which is more volatile.
- Whereas a 100-day Force Index is smoother and crosses the zero line fewer times and traders can use this to determine the medium or long-term trend.
In the image above the 100-day Force Index is corresponding to a resistance breakout on the price chart. The 100-day Force Index moved into positive territory and broke resistance at the end of February. This indicator turned positive during the entire uptrend and see a big rally in Reliance Industries.
Advanced Trading Rules
- 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 a 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 a bullish divergence and warns the price may soon head higher.
In, the chart we can see intraday charts of the State Bank of India with the Force Index plotted on it. In the Elder Force Index indicator, chartists can use the divergence or trendline breaks on the price chart for confirmation of a bullish or bearish position.
More Important Points on Elder Force Index
- Traders should use the Force Index in conjunction with other indicators.
- By using the particular indicator, traders can identify the overbought and oversold situations also.
- When the price level moves to the up extreme level, consider the overbought level. After the overbought situation, the seller’s power will be at an extreme level.
- And, if the price is down it creates oversold. After the oversold, buyers’ power will be the highest.
- Price can stay a long time at an overbought/oversold level.
The Elder Force Index (EFI) was developed by Alexander Elder, a renowned technical analyst and trader. It measures the amount of buying or selling momentum in the market using a combination of price change and volume over time.
You can use EFI to identify potential trend reversals by looking at how recent trading activity compares with previous levels. If an upswing follows prolonged bearishness, then it may indicate an impending trend reversal into bullish trend territory. Conversely, if there is a downswing after extended bullishness it could be an early warning signal that the trend will soon reverse downwards.
Relative Strength Index (RSI), which was created by J Welles Wilder Jr., uses current prices for indicator calculations rather than volume as EFI does; this makes RSI much less sensitive to consumer sentiment than EFI. In addition, RSI calculates its signals from values within defined time periods whereas EFIs scale readings come from cumulative movements stretching back over multiple timescales, thus helping identify long-term trends which are often missed on the shorter termed interpretations of traditional indicators such as RSI.
The Force Index can help traders make decisions about when to buy or sell depending upon whether it’s trending up or down over certain timeframes; most commonly longer-term trends are preferred as they provide more reliable signals compared to short-term ones due to various factors such as news events having large impacts on markets throughout their course hours but barely emerging in any noticeable way across weeks or months.
However, in the chart parameters, the chartists can use a higher number for more smoothing or a lower number for less smoothing. This indicator uses both price and volume to measure buying and selling pressure. In the portion of the price covers the trend, while the volume portion determines the intensity.