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It is used for trend identification, corrections, and for identifying potential reversals. This indicator was developed by Dr. Alexander Elder in It measures the force or power of bulls behind price rallies and the force or power of bears behind price declines. Unlike regular oscillators, this oscillator fluctuates around the zero line. All three are combined by the EFI to create the oscillator. EFI is calculated as the difference between the current and the previous closing price multiplied by current trading volume.
The default period is taken as 13 period and the period Force Index is computed by taking 13 period EMA of above calculated Force Index. Whenever there are large price movements on large volume, there are usually spikes on the EFI indicator. Typically, the farther the Force Index line away from the zero line, stronger is the trend. When EFI goes above the zero line forcefully, it indicates a strong buying pressure.
When EFI goes below the zero line forcefully, it indicates a strong selling pressure. Bullish Market Corrections: When the EFI goes below zero during an uptrend, it typically rallies back above zero soon. Traders can choose long positions when EFI is below zero to make profitable trades. Bearish Market Corrections: When the EFI rallies above zero during a downtrend, it typically drops back below zero soon. Traders can choose short positions when EFI is above zero to make profitable trades.
Divergence is said to happen when the EFI indicator and price do not move in the same direction. This usually means that either volume or the extent of price moves has slowed.
This indicates that the selling pressure is decreasing and the price may move higher. This indicates that the buying pressure is decreasing and the price may move lower. When there is a bullish divergence between EFI and price, traders go long.
Bearish Signals When the stock is in a downtrend and the force index turns positive, traders enter or add to short positions. When there is a bearish divergence between EFI and price, traders go short. Happy Trading!
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It is used for trend identification, corrections, and for identifying potential reversals. This indicator was developed by Dr. Alexander Elder in It measures the force or power of bulls behind price rallies and the force or power of bears behind price declines. Unlike regular oscillators, this oscillator fluctuates around the zero line.
How To Use Elder’s Force Index To Make Better Trades