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 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 are three essential elements are 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.
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, big move on big volume produces a high Force Index values. Small moves on low volume produce relatively low Force Index values. Advantage on 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. This indicator is available in the STUDIES section in Zerodha Kite.
This indicator can be used to reinforce or determine the trend. The Elder Force Index indicator’s default parameter is 13. For determining longer-term trend 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 this can be used to determine the medium or long-term trend. Check the image below:
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 in end of February. This indicator turned positive during the entire uptrend and see the big rally in Reliance Industries.
In, the chart we can see intraday charts of State Bank of India with the Force Index plotted on it. In Elder Force Index indicator chartists can use the divergence or trendline breaks on the price chart for confirmation of a bullish or bearish position.
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 price covers the trend, while the volume portion determines the intensity. Chartists can use a long-term Force Index to confirm the underlying trend. When the 100-day Force Index is positive, then bulls have the edge. In all indicators, traders should use the Force Index in conjunction with other indicators.