Force Index fluctuates above and below zero and it is above zero when the price is above the prior close; it is below zero when the stock price is below the prior close. This occurs when the indicator is set to calculate Force Index value for each period. Typically the indicator is averaged over more than one price bar though.
You must set the indicator to 13 periods and it will take an average reading of the Force Index values over 13 periods to creates a smoother average, and provide more useful information. Based on the magnitude of the price move and the volume for that price bar, one can find how far the indicator moves above or below zero. The large price moves on large volume create significant and noteworthy swings on the Force Index. A large move with little volume creates a smaller swing on the Force Index. If there is little volume or price movement the Index oscillates around zero, showing the price has no well defined direction or power. Under most circumstances, trades are avoided when there is a lack of strong movement as indicated by the Force Index.
Calculation of Force Index
Here is the calculation for the force index:
Force Index (1) = [Close (current period) – Close (prior period)] x Volume
Force Index (20) = 20-period Exponential Moving Average of Force Index (1)
It is said that a 13-period average highlights short-term trends, and is suitable for shorter-term traders. A 100-period Force Index average will highlight longer-term trends and is preferred by longer-term traders.
The Force Index is available on most trading platforms.
Use of Force Index
Basically, the Force Index has three primary uses: trending confirmation, isolating corrections within trends and highlighting underlying strength or weakness.
Confirmation of Trend
Usually, the indicator visually shows when a strong shift in buying or selling momentum occurs. It is observed that when the Force Index clings to the zero line, there is little momentum and traders may want to stay on the sidelines instead of initiating trades. If the Force Index moves forcefully below zero it shows strong selling pressure; when the indicator stays below zero it signifies a downtrend. On the indicator, a forceful rise above zero on the indicator shows strong buying pressure; when the indicator stays above zero it signifies an uptrend.
If the indicator moves below its own small range created around the zero line, then it signals the start of the price downtrend. When the indicator rallies back above zero it indicates the potential for a price uptrend.
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