Investing & Trading

Force Index Study

By Samantha Baltodano


TL;DR:

The Force Index is a technical indicator that measures the strength of price movements in the market by combining price movements and trading volume.


The calculation of the Force Index involves multiplying the difference between the current price and the previous price by the current trading volume and smoothing the result using a moving average, typically a 13-period exponential moving average.


The Force Index can provide traders with trade signals such as bullish and bearish divergences, trend confirmation, moving average crossovers, and support and resistance levels. However, traders should use the Force Index in combination with other technical indicators and price analysis, as well as considering market conditions and other factors before making a trading decision.


What Is The Force Index Study?

The Force Index is a technical indicator used to measure the strength of price movements in the market. It combines price movements and trading volume to determine the strength of a trend.


The Force Index is based on the premise that price movements and volume are two essential components of trading, and the two are interdependent. 


As such, the Force Index helps traders to identify divergences between price and volume, as well as confirm the strength of a trend.


Calculation

The Force Index is calculated by multiplying the difference between the current price and the previous price by the current trading volume. The result is then smoothed using a moving average. 


The formula is as follows:


Force Index = (Close (current period) – Close (prior period)) x Volume


The resulting value is then smoothed using a moving average, typically a 13-period exponential moving average (EMA).


Force Index = EMA [((Close (current period) – Close (prior period)) x Volume), 13]


A 13-period EMA is used to smooth the values because it provides a good balance between sensitivity and smoothness. Traders can adjust the smoothing period to their preference based on their trading strategy.


Example

To better understand the Force Index, let's consider a simple example. 


Let's say the current closing price of a stock is $50, and the previous closing price was $40. The current trading volume is 500,000 shares. 


Using the formula, we can calculate the Force Index as follows:


Force Index = (Close (current period) – Close (prior period)) x Volume

= ($50 - $40) x 500,000

= $5,000,000


Next, we smooth the value using a 13-period EMA:


Force Index = EMA [((Close (current period) – Close (prior period)) x Volume), 13]

= EMA [($5,000,000), 13]


The resulting value can be plotted on a chart to provide a visual representation of the trend's strength. 


If the Force Index is increasing while prices are rising, it suggests that the trend is strong and likely to continue. 


Conversely, if the Force Index is decreasing while prices are rising, it suggests that the trend may be losing momentum.


Trade Signals

The Force Index Indicator can provide traders with several signals that can help them make trading decisions. Here are some of the trade signals that can be generated using the Force Index:


  1. Bullish and Bearish Divergences - Bullish divergences occur when the Force Index is increasing while prices are falling, suggesting that the trend may be about to reverse. Conversely, bearish divergences occur when the Force Index is decreasing while prices are rising, suggesting that the trend may be losing momentum. These divergences can be used as potential signals for a trend reversal.
  2. Trend Confirmation - When the Force Index is increasing while prices are rising, it suggests that the trend is strong and likely to continue. Conversely, when the Force Index is decreasing while prices are falling, it suggests that the trend is losing momentum. These signals can be used to confirm the strength of a trend.
  3. Moving Average Crossovers - When the Force Index crosses above its moving average, it suggests that buyers are gaining strength and the trend may be turning bullish. Conversely, when the Force Index crosses below its moving average, it suggests that sellers are gaining strength and the trend may be turning bearish. These signals can be used as potential entry or exit points.
  4. Support and Resistance Levels - When the Force Index reaches support or resistance levels, it can be used as a potential signal for a trend reversal or continuation. If the Force Index reaches a support level and begins to increase, it suggests that buyers are gaining strength and the trend may continue. Conversely, if the Force Index reaches a resistance level and begins to decrease, it suggests that sellers are gaining strength and the trend may reverse.


Traders should use the Force Index in combination with other technical indicators and price analysis to make informed trading decisions. It is also essential to consider market conditions and other factors before making a trading decision.



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The Force Index Indicator is a powerful tool that traders can use to measure the strength of a trend in financial markets. 


By combining price movements and trading volume, the Force Index can help traders identify divergences between price and volume and confirm the strength of a trend. However, traders should use the Force Index in conjunction with other technical indicators and price analysis to make informed trading decisions. 


Additionally, it is essential to consider market conditions and other factors before making a trading decision.



Test The Force Index Study

Great news! 


You can back test this exact strategy on historical data for any of your favorite symbols using TradingView. 


This strategy has already been built and all you have to do is log in and take it for a spin. You can access this indicator here.


If you’re new to back testing and to TradingView, don’t worry. I created a step-by-step guide you can follow to begin testing the Force Index Study.


Summary

  • The Force Index is a technical indicator that measures the strength of price movements in the market by combining price movements and trading volume.
  • The Force Index helps traders identify divergences between price and volume, as well as confirm the strength of a trend.
  • The Force Index is calculated by multiplying the difference between the current price and the previous price by the current trading volume, then smoothed using a moving average, typically a 13-period exponential moving average (EMA).
  • Traders can use the Force Index to generate trade signals such as bullish and bearish divergences, trend confirmation, moving average crossovers, and support and resistance levels. However, it's recommended to use the Force Index in combination with other technical indicators and price analysis and consider market conditions and other factors before making a trading decision.


Force Index is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.


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