The Force Index by John A. Sarkett
Here's a little-known indicator that combines price change and volume to create a short-term and an intermediate-term trading tool.
Like ocean waves, prices have an ebb and a flow. Once in a while, however, a huge shift in price and volume hits the market with the impact of a tidal wave, setting the stage for follow-through price movement. One particular indicator, the force index, measures and depicts this major event more vividly than any other. Developed by Alexander Elder, it is presented at length in his latest book, Trading for a Living.
The force index focuses on three key pieces of market information: price change, extent of price change and trading volume. The force of every move is defined by its direction, distance and volume. If prices close higher, the force is positive; if it is lower, then the force is negative. The greater the change in prices, the greater the force. The greater the volume, the greater the force. That's the simple concept behind the force index.
Like other oscillators, the index works best if it is smoothed with an exponential moving average (EMA). The index smoothed with a short EMA - for example, two days - helps pinpoint entry and exit points. The force index smoothed with a longer EMA - for example, 13 days - shows major change in the force of bulls and bears.