Swing Trading Strategies & Stock Picks Since 2003

Force Index was an indicator created by Dr. Alexander Elder in his book Trading for a Living. Both were derived from volume data as he knew the importance it plays in influencing prices and the markets.

Volume don't get much respect among the trading community due to the fact that many popular indicators are derived from price and a few from volume (OBV, Open Interest and Short Interest are mainly used by the options traders).

But this indicator can be instrumental in deciphering the volume in the market place. Volume is a hard indicator to read despite many published works explaining how to use it.

The Force Index is best used watching for a divergence pattern. When this occurs, a good setup may be in the making.

Best time to trade these divergence patterns are in the first 2 hours of the market opening.

Volume doesn�t lie. When used with price, it shows who is in control-- bulls or bears. And especially when seeing high volume in a short period of time shows the urgency of the bulls or bears, either wanting to taking control or simply panicking.

As the charts show, any timeframe or any Force Index parameter settings, this indicator is a powerful tool to get a clear view of who is controlling the market when the divergence appears.

When to enter? Two entries can be taken:

1. For shorts, when the 2 peaks on the Force Index indicator are identified as diverging from price (troughs for longs) in between these 2 peaks in the price charts, there is a dip, mark the low of that dip carefully as prices progress past the second peak. If prices falls below that dip between the 2 peaks, that is the short entry point. Please see #1 entry in chart below.
2. After the second dip has been identified and confirmed (after 2 or 3 bars past the peak), wait for the next rally to enter the short. Please see #2 entry in chart below.

 
When to exit? There are two types of exits:
1.The stop loss is set to last high pivot. The chart below shows the red horizontal line as the stop loss level.

2.When another divergence in the opposite direction has appeared. For example, a long position was in progress when a short divergence appears, it's a good moment to exit. The chart below shows the prices continue to make a new lower low (second blue shade on the bottom), but the Force Index shows a bullish divergence. This is a good area to exit.

3.Using the Force Index indicator lines to signal an exit. Similar to the stochastic indicator, if the fast line is crossing the slow line, an exit is taken. Note the shaded blue box on the bottom where the red and green line is crossing. This is the ideal exit.

Force Index works best on Equivolume bar type chart since they both show clearly how a big an impact volume plays on price, making easier to identify the divergences. All of the above charts were set in Equivolume bar type in SwingTracker. These setups come once every few days, especially on days with opening gaps. They usually happen in the morning. Paying close attention to these divergences can produce rewarding trades.