The Nomad Trader
The force index is a technical indicator that measures the amount of power used to move the price. Developed by Alexander Elder, it is a lagging indicator, but useful for long-term traders. The force index confirms rising or falling prices, and can be used to determine bearish divergences. Elder’s experience as a psychiatrist gave him unique insight into the psychology of trading, which is important for understanding the market and indicators.
The Force Index: An Overview of the Technical Indicator
Introduction
Technical indicators have become an essential part of trading and have been developed by various trading experts to help measure a variety of trading dynamics. The Force Index is one such indicator, which measures the amount of power used to move the price. In this article, we will discuss the Force Index, its formula, and how it can be used as a tool to help measure a market’s momentum.
The Force Index Formula
The Force Index was developed by Alexander Elder and was published in his book Trading for a Living in 1993. The index uses the price plus volume to determine the strength behind the price movements. The formula is as follows:
Force Index = (Close Price − Prior Close Price) x Volume
The Force Index is an oscillator that fluctuates between negative and positive territory. Rising values indicate bullishness, and falling values indicate bearishness.
Alexander Elder: A Brief Biography
Alexander Elder was born in Leningrad and grew up in Estonia, where he entered medical school at the age of 16. However, at the age of 23 while working as a ship’s doctor, he jumped a Soviet ship in Africa and received political refugee status in the United States. He worked as a psychiatrist in New York City and taught at Columbia University. His experience as a psychiatrist provided him with unique insight into the psychology of trading.
The Importance of Trading Psychology
Alexander Elder’s background in psychiatry reinforced the idea that trading psychology is an indispensable aspect of trading. The psychology of trading is the key to understanding all trading dynamics and indicators, including the Force Index and price action patterns. Ignoring the psychological aspect of trading is equivalent to denying the importance of the human component in trading. Traders who ignore the psychological aspect of trading are likely to find themselves making irrational and unprofitable decisions.
The Role of the Force Index in Trading
The Force Index is a technical indicator that measures the strength of the bullish or bearish momentum in the market. When the Force Index is rising above zero, it helps to confirm rising prices. Falling below zero confirms falling prices. The larger the periods of the Force Index are, the smoother the index is. Large periods are more suitable for long-term traders who use larger periods. Smaller periods may work for scalping, but they are too volatile for long-term trading.
Using the Force Index for Confirmation
Traders can use the Force Index to confirm a breakout in price when a breakout or spike occurs in the index. If the index is making lower swing highs while the price is making higher swing highs, this is a bearish divergence, which warns that the price may soon decline.
Disadvantages of the Force Index
Like any technical indicator, the Force Index has both advantages and disadvantages. One significant disadvantage of the index is that it is a lagging indicator. The data that goes into the index is typically put into an average, making it slow to provide real trading signals. For example, it may take a couple of periods for the Force Index to start rallying after an upside breakout. By this time, the price may have already moved significantly beyond the breakout point, making it too late to enter the trade.
Conclusion
In conclusion, the Force Index is a technical indicator that measures the strength of the bullish or bearish momentum in the market. It can be used to confirm breakouts, and traders can use it to spot bearish divergences. However, it has its disadvantages, as it is a lagging indicator. Ultimately, the Force Index can be a valuable tool to help measure market dynamics. Traders should ensure they add the psychological component of trading to their strategy to maximize their profits.
