Elder’s Force Index is an indicator that helps to assess who is currently dominating the market: buyers or sellers. The developer of this indicator is Alexander Elder, a well-known trader and author of popular books on trading.
The following parameters are evaluated in the Force Index indicator calculation algorithm:
- Direction of price movement
- The amount of price change for a certain period
- Trade volume
The Elder Force Index provides an indication of which direction the market is moving. If the indicator line is in the area above 0 and shows the next maximum, this indicates an upward trend and the dominance of “bulls.” If the Elder’s Force Index falls below 0 and forms local minimums, the market is in a downward trend and “bears” set the tone.
The Force Index indicator is built in a separate window directly below the price chart and consists of one main line and the central level 0.
To improve results, Elder recommended averaging the Force Index values using the Exponential Moving Average (EMA). Therefore, the formula for calculating the indicator values appears as follows:
FORCE INDEX = EMA ((Pn – P(n-1)) * VOLUME)
- ЕМА is Exponential Moving Average.
- Pn is closing price of the current candle.
- P(n-1) is closing price of the previous candle.
- VOLUME is volume of the current candle.