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How To Identify Trend And Correction Using Force Index

elearnmarkets | 06 Nov, 2017  | Follow Author | Add to my Favourites 
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The Force index measures the strength behind the price move based on three important parameters which includes volume, direction and extent. It was invented by Alexander Elder and this oscillator actually fluctuates around the zero line.


When the indicator goes from positive to negative, the uptrend possibly comes to an end and it marks the starting of downtrend. Similarly when the indicator goes from negative to positive, it signals the beginning of an uptrend.


Calculation

It is calculated as the difference between the current and the previous closing price multiplied by current trading volume. The default period is taken as 13 period and the 13-period Force Index is computed by taking 13 period EMA of above calculated Force Index.

Force Index(1) = {Close (current period)  –  Close (prior period)} x Volume

Force Index(13) = 13-period EMA of Force Index(1)


How is it helpful to traders?

The Force Index primarily has three main uses which includes identifying corrections within the trend, trend confirmation and locating divergences. Let’s understand each of these uses in detail-

Trend Identification/Confirmation

The indicator basically shows strong shift in buying and selling momentum. The traders want to be on the sidelines when the force index clings close to the zero line as it indicates weak momentum.


When the Force index stays above the zero line, it signals an uptrend. When it goes above the zero line forcefully, it shows strong buying pressure. You may do NSE Academy Technical Analysis course to enhance your understanding about Technical analysis and various strategies.


Similarly, when it stays below the zero line, it signals a downtrend. When it goes below the zero line forcefully, it shows strong selling pressure.


 

 

The above is the weekly chart of Nifty 50. It is clearly evident that whenever the Force index is above the zero line, Nifty has been in a positive territory and has given a good up move.


Similarly, when it is below the zero line, Nifty has given a good correction. The farther it is away from the zero line, stronger is the trend.


Identifying Corrections

With the help of trend confirmation or identification and short term Force Index (say 2-period), one can find good entry points during the trending phase. This is actually a very active strategy but if you want to decrease the number of trading signals, you may increase the time period on the Force Index.

During an uptrend, when the 2-period Force index goes below the zero line and then rallies back above zero, a buy signal is generated.

Similarly, during a downtrend, when the 2-period Force index goes above the zero line and then rallies back below zero, a sell signal is generated.

 

Divergence

Divergence takes place when both the price and the indicator are not moving in the same direction. Suppose the price is making higher high but the indicator is making a lower high and vice versa.

Divergence basically shows weakness in the existing trend and signals either the magnitude of price or the volume is weakening. It doesn’t provide any entry point or a trading signal rather alerts traders about a probable reversal in the coming period. However, reversal could take a long time to happen or it may not come at all.


Bottomline

The force Index is a versatile indicator which actually combines both price action as well as volume to quantify a valuable metric. It should be used in conjunction with price patterns and other indicators in order to filter out the divergence and also to trade the divergence in a better way.


Disclaimer:


Elearnmarkets wants to inform you that this post/video is solely for educational purpose. We are not advising any trading or investment ideas. We want to add that the data/indicator/signals contained in this website/post/video are not necessarily real-time nor accurate. All CFDs/traded instruments (stocks, indexes, futures, commodities) and Forex prices are not provided by exchanges but rather by web based charting platforms, and so prices/indicators may not be accurate and may differ from the actual market prices, meaning prices are indicative and not appropriate for trading or investing purposes. Therefore, Elearnmarkets doesn`t bear any responsibility for any trading losses you might incur as a result of using this data/ indicators/charting platform. This analysis is purely based on the technical observations and not meant for investing with real money. Elearnmarkets does not have any position in the market. One can create position in market at his/her own risk.


Elearnmarkets or anyone involved with Elearnmarkets will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals/discussions contained within this website/post. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.






About elearnmarkets

www.elearnmarkets.com is a young vibrant company established with the vision of taking online financial education to a new level, both in India and abroad. Guided by their mission of spreading financial literacy, they are constantly experimenting with new education methodologies and technologies to make financial education convenient, effective, and accessible to all. They provide courses on basic finance, Fundamental Equity research, Technical analysis, Economics, Derivatives, Currencies and Commodities and many of their courses are conducted by reputed market experts and certified by leading exchanges like NSE, MCX and NCDEX.


For more information please write in to [email protected]


Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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