As noted above, there are three elements to the Force Index. First, there is either a positive or negative price change. A positive price change signals that buyers were stronger than sellers, while a negative price change signals that sellers were stronger than buyers. Second, there is the extent of the price change, which is simply the current close less the prior close. The “extent” shows us just how far prices moved. A big advance shows strong buying pressure, while a big decline shows strong selling pressure. The third and final element is volume, which, according to Elder, measures commitment. Just how committed are the buyers and sellers? A big advance on heavy volume shows a strong commitment from buyers. Likewise, a big decline on heavy volume shows a strong commitment from sellers. The Force Index quantifies these three elements into one indicator that measures buying and selling pressure.
The Force Index can be used to reinforce or determine the trend. Said trend, whether short-, medium- or long-term, is dependent on the Force Index parameters. While the default Force Index parameter is 13, chartists can use higher or lower numbers for more or less smoothing, respectively. The chart below shows Home Depot with 100- and 13-day Force Indexes. Notice how the 13-day Force Index is more volatile and jagged while the 100-day Force Index is smoother and crosses the zero line fewer times. In this regard, the 100-day Force Index can be used to determine the medium- or long-term trend. Notice how a resistance breakout on the price chart corresponds to a resistance breakout on the 100-day Force Index. The 100-day Force Index moved into positive territory and broke resistance in mid-February. The indicator remained positive during the entire uptrend and turned negative in mid-May. The early June support break on the price chart was confirmed with a support break in the Force Index.
Bullish and bearish divergences can alert chartists of a potential trend change. Divergences are classic signals associated with oscillators. A bullish divergence forms when the indicator moves higher as the security moves lower. The indicator is not confirming weakness in price; this can foreshadow a bullish trend reversal. A bearish divergence forms when the indicator moves lower as the security moves higher. Even though the security is moving higher, the indicator shows underlying weakness by moving lower. This discrepancy can foreshadow a bearish trend reversal.
Confirmation is an important part of bullish and bearish divergences. Even though the divergences signal something is amiss, confirmation from the indicator or price chart is needed. A bullish divergence can be confirmed with the Force Index moving into positive territory or a resistance breakout on the price chart. A bearish divergence can be confirmed with the Force Index moving into negative territory or a support break on the price chart. Chartists can also use candlesticks, moving average crosses, pattern breaks and other forms of technical analysis for confirmation.
The chart above shows Best Buy (BBY) with the Force Index (39) sporting a series of divergences. The green lines show bullish divergences and the red lines show bearish divergences. A bullish divergence is confirmed when the Force Index (39) crosses into positive territory (green dotted lines). A bearish divergence is confirmed when the Force Index (39) crosses into negative territory (red dotted lines). Chartists can also use trend line breaks on the price chart for confirmation.
This chart shows two versions of the Force Index. The Force Index (13) captures short-term fluctuations and is more sensitive. The Force Index (39) captures medium-term fluctuations and is smoother. The 39-day Force Index produces fewer and longer-lasting zero line crossovers and these crossovers last longer. There is no right or wrong answer for these settings; it all depends on personal trading objectives, time horizon and analytical style.
The Force Index can be used in conjunction with a trend following indicator to identify short-term corrections within that trend. A pullback from overbought levels represents a short-term correction within an uptrend. An oversold bounce represents a short-term correction within a downtrend. Yes, corrections can be up or down, depending on the direction of the bigger trend. Alexander Elder recommends using a 22-day EMA for trend identification and a 2-day Force Index to identify corrections. The trend is up when the 22-day EMA is moving higher, which means the 2-day Force Index would be used to identify short-term pullbacks for buying. The trend is down when the 22-day EMA is moving lower, which means the 2-day Force Index would be used to identify short-term bounces for selling. This is an aggressive strategy best suited for active traders.