Force Index

We say repeatedly on this site that the foreign exchange market trends 70% of the time. But when the market isn’t trending, it moves with force. Luckily, the Force Index exists to tell us how weak or strong the force is with each trend.

How the Force Index Works

The Force Index takes into consideration three major inputs:

1. Direction of price change – The Force Index considers whether recent movements where bullish or bearish.
2. Rate of Change – Much of the Force Index is built around the rate of change in a particular currency pair. You cannot measure force without knowing how fast, or how strongly, a currency pair moves in a particular direction. Naturally, rate of change is included in the calculus for the Forex Index.
3. Trading Volume – Volume helps us understand to what extent traders are putting their money behind recent movements in a currency price.

Interpreting the Force Indicator

The Force Indicator found in Metatrader and TradeStation platforms work on the basis of a histogram. Each reading is plotted, with 0 being the center line. Below zero, the Force is pointing toward the bears. Above zero, the force is with the bears.

As with any momentum indicator, it pays to be on the side with the most force. As a momentum trader, your goal is to ride new and emerging trends as they happen, and the force indicator will allow you to do just that.

Traders often smooth the force indicator with an exponential moving average, especially for use on short-term charts. By adding an EMA to the Force Indicator, one can take into consideration changes to force over a period of time, not just from one bar to the next. As one would expect, the variance in short-term volume and rate of change makes the force indicator difficult to use on shorter term bars like the 1m and 5m charts. Adding an EMA to an indicator helps to smooth out the happenings of a single bar to find if prevailing force is indicative of a trend or just a minor jump in strength or weakness.

Find Breakouts with the Force Indicator

Traders want to buy when the indicator is above zero, and sell below zero. But this surely isn’t the only way to trade the force indicator.

Like Bollinger Bands, which tighten ahead of future volatility, the Force indicator can be used to spot oncoming volatility in the markets.

When volume is weak, the Force indicator will trend around a zero reading. If volume is strong, however, and the indicator remains near zero, look out! The next big trend is sure to emerge when bulls overpower bears, or vice versa.

The force indicator is great for trading forex options, which are priced on the basis of price being a function of time. If volume is building but force remains weak, the next move will be a large up or down move. Option traders could go both long and short, effectively betting on volatility. An options trader would profit when the currency pair moves wildly from its starting point.