One of the most respected traders Dr. A. Elder, developed force index to measure force (power) behind market movement. The force index is a modern oscillator, using price and volume for its calculations.
Anatomy of force index forex oscillator
Force index compares close on previous candle to current candle close, by subtracting. Results are multiplied by volume on current candle. Logically, if current close price is higher than yesterdays, the movement was bullish.
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Strength of the movement is determined by either extent of the movement, or its volume. Both situations and they combinations are represented as substantial change in force index.
As other oscillators (such as RSI or Stochastic), central value of force index is zero. Bullish market will lead to positive values above zero, while bearish markets will be represented by negative values.
To smooth choppy line of force index, plotting MA (moving average) directly into the indicators window is often recommended.
Using force index forex indicator
Position filter. Trade long only, when force index is above zero line. Trade short only, when force index values are negative. We can also smooth force index with MA to remove most of the price noise and some fake signals.
Health and strength of the trend. Identification by force index indicator. Uptrend hitting new force index high is most likely to continue. Downtrend hitting a new force index low is also more likely to continue. In both cases it signalises dominance of the trading group responsible for analysed move. Increasing extremes in force index readings, are signalising that either bulls or bears are winning the fight of price movement, with growing ease.