How to Use The Force Index Indicator in Forex?
The Force Index indicator combines the currency pair’s price and volume to determine the power of bulls and bears in the market. It signals the trend that is likely to continue in the market, giving you the opportunity to place a trading order accordingly. The higher the index value, the higher the chance of an uptrend continuation and vice versa. In our article, we will learn in-depth about the forex Force Index indicator.
What is the Force Index indicator?
Force Index is an oscillator indicator that measures the force/power of bulls or bears in a market. The indicator compares the current currency pair price to the prior price to identify the current trend’s strength. The ‘force’ here refers to the amount of power held by buyers or suppliers in the market. You can place a short order when the Force Index provides readings touching new lows, indicating bears are more powerful. In contrast, you can place a long order when the Force Index provides trading touching new highs, indicating bulls are more powerful.
- The force is positive when the current closing price is more than the previous closing price, signalling an uptrend continuation and buyers being more powerful.
- The force negative when the current closing price is less than the previous closing price, signalling a downtrend continuation and sellers being more powerful.
How is the Force Index calculated?
The Force Index is calculated by comparing the current market price with the previous market price and multiplying its difference with the traded volume during a specific time period. The indicator measures how strong the current market trend is and whether the market is going to continue or reverse. Force Index formula = (CCP -PCP)*VFI(13)=13 period EMA of Force Index Where, CCP = current close price PCP = previous close price VFI = volume force index EMA = exponential moving average 13 = number of trading periods considered By using this formula, you can determine the strength of the force through the size of the change in price or volume. The larger the change, the higher the force and vice versa. These values are plotted on a histogram with zero as the centreline.
- A positive Force Index indicates a higher market which is plotted above the centreline, signalling traders to place long orders.
- A negative Force Index indicates a lower market which is plotted below the centreline, signalling traders to place short orders.
- An unchanged market makes the Force Index go back to the centreline.
What is the Force Index indicator used for?
Force Index can identify and determine trends in the forex market in the short-term, medium-term, or long-term timeframe.
- A higher period, like 100-day, can determine medium and long-term trends.
- A lower period, like 13-day, can determine short-term trends.
When the indicator remains positive during an uptrend and breaks above its resistance level, it indicates an uptrend continuation. On the other hand, when it remains negative during a downtrend and breaks below its support level, it indicates a long-term downtrend continuation.
With the Force Index indicator, you can also identify divergence through bullish and bearish alerts. The potential trend change provides ideal price levels to exit or enter the current trend. When the Force Index indicator gives a lower value, but the currency pair prices move higher, it indicates a bearish divergence and signals traders to place short orders. When the Force Index indicator gives a higher value, but the currency pair prices move lower, it indicates a bullish divergence and signals traders to place long orders. The bullish divergence is confirmed when the Force Index indicator has remained in the positive territory, facing a resistance breakout, for a long period of time. Similarly, a bearish divergence is confirmed when the Force Index indicator has remained in the negative territory, facing a support break, for a long period of time.
The Force Index helps in identifying market price corrections when combined with a trend-following indicator like Bollinger Bands or Moving Averages. When there is a price pullback from the overbought market level, it indicates a correction within an uptrend, signalling traders to place short orders. On the other hand, a breakthrough from the oversold market level indicates a correction within a downtrend, signalling traders to place long orders. A long-term EMA for 22 periods can be compared with a short-term Force Index indicator for 2 periods to identify the type of price correction occurring.
- When the EMA moves higher than the Force Index, it indicates a pullback in buying (uptrend correction).
- When the EMA moves lower than the Force Index, it indicates a bounce in selling (downtrend correction).
How to trade with the Force Index indicator
You can trade with the Force Index indicator by combining a short-term EMA (2-period) and a long-term EMA (13-period) to determine the short-term and overall trend in the market, respectively. When the long-term moving average of the Force Index touches a new high in the market, it will indicate a strong uptrend. At this point, you can enter long orders to benefit from the rising prices. On the other hand, if the 13-period EMA of the Force Index touches new lows, it will indicate a stronger bearish force. At this point, you should consider entering short orders to benefit from the falling markets. On the other hand, if the strong rise or fall in prices is not supported by similar strength in volume, it will indicate a trend reversal. In this case, a strong uptrend supported by low volume will indicate a bearish reversal and signal you to place short orders and exit long positions. Whereas a strong downtrend supported by low volume will indicate a bullish reversal in the market and signal you to place long orders and exit short orders to trade effectively.
Use the Force Index indicator today
The Force Index indicator helps you make successful trading decisions based on the currency pair price and volume. With our user-friendly forex trading platform in Australia, you can combine the Force Index indicator with other indicators to kickstart forex trading. Sign up for a live trading account or try a risk-free demo account.
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