Force Index
Definition:
The ForceIndex indicator relates price to volume by multiplying net change and volume. ForceIndex is calculated using the following equation:
ForceIndex = Volume(today) * (Close(this period) - Close(last period))
ForceIndex is typically presented as two smoothed averages (slow and fast) to reduce the likelihood of false signals.
Interpretation:
ForceIndex is used by some investors as a running total of where money is flowing. Because this indicator multiplies price movement in a period by the volume of that period, the value of ForceIndex will change the most when net change is accompanied by higher relative volume. Investor can use this index to both (a) compare current price movements to past ones and (b) evaluate the current trend. The periods used are a moving average of the ForceIndex values, which reduces choppiness. Generally, investors use periods which match the length of the trends in which they are studying. The longer-average will be the intermediate or longer-term trend and the shorter-average will be a shorter-term trend. Some conventional interpretations follow:
One interpretation is to look for a confirmation or divergence between ForceIndex and the price. When ForceIndex moves up with price increases or down with price decreases, it can indicate that the current trend is has momentum. When ForceIndex diverges from price, it can indicate that the trend may change.
Another interpretation is to receive signals based on a crossover of the two lines. When the slow line crosses above the fast line and they are both increasing, it can be considered a confirmation of an uptrend. Conversely, when the fast line crosses below the slow line and they are both increasing, it can be seen as confirmation of a downtrend. When a crossover occurs when the lines are going in opposite directions, it can indicate a trend reversal.
Some traders seek to eliminate some false signals by using only the signals which correspond to the direction of the intermediate to long term trends.
