Trading on Forex is a constant study of the market, which resulted in new methods and new technical analysis indicators. Russian emigrant, Dr. Alexander Elder is one of the most famous creators of a new generation of technical indicators to trade markets. One of the many indicators is the "index of strength."
Power index, a technical indicator, from the category of oscillators, which measures the strength of bulls behind the growth of the financial asset, or the power of bears, which stand for the collapse of the financial asset. Components of the indicator are the main components of market information is: the size of the price movement, direction and volume. The author said that the indicator that all smoothed moving average will give accurate readings of force bears and bulls. This indicator is considered the best and most unique in that it amounts and see prices combined into a single value.
Calculation of the index of force:
To calculate the index forces use different formulas, which give the same result. We suggest you consider the calculation using the two formulas, this method is much easier and more understandable to others (see formula below).
Formula number 1. Raw translated to English means raw, in other words means Raw FI basis Force Index (FI), which is equal to the trading volume multiplied by the difference closing price of the current candle (Close i) and the closing price of the previous candle (Close i-1)
Formula number 2. This is the final stage of the calculation, which will give an accurate result indications. Power index is, the exponential moving average multiplied by a base that we have already found (in the formula number 1).
When one can use any moving average (SS), but the exponential CC recommended the creator of the indicator.
Description of indicator:
"Force Index" uses tick volume and the difference between the current closing price to the previous closing price. Thus, given the volume and the difference, the indicator may determine the dominant force, which now forms the basis of the price movement. In other words, the difference of closing prices gives an idea of the power of buyers and sellers, and for more accurate results, use the trading volume.
Proceeding from the above, the indicator may determine not only the direction of the trend, but also its strength. If the indicators are rising, it indicates that, at the moment the market is dominated by the power of the bulls, respectively, if the indicator falls, it means increase in strength of bears.
How does the indicator Moving Average : The indicator settings you can set different periods of the SS. At the default setting is set to the period SS 13, but many traders often use a longer period (eg, 20). This move will allow one to change the long-term trend.
Behavior indicator for trend. When you start ascending trend , indicator must also move in the direction of trend. If new highs and trend indicators are the same, this is evidence of the power trend, but if they do not match - new highs in the indicator below the highs trend, then it means that the trend is losing strength. If the indicator crosses the average mark down in an uptrend, it means that the market took the initiative and bear trend starts to fall. In a downtrend is completely opposite situation.
Thus, the main purpose of the indicators is the definition of force, which currently dominates the market.
The use of indicators
Key messages:
The signals that are associated with the movement of the indicator. Open positions, based on the indicator, it is recommended only when the trend of the market. If the indicator is in the negative, then you should buy, and sell when the indicator is in the positive area. The same indicator reported a change of the dominant forces. If the indicator line crosses the center line from the top down, it means that the initiative passed to the bears, and accordingly, if the indicator line crosses the center line from the bottom up, it indicates a growing force of bulls.
Lateral movement of the indicator. Important element for any trader is the lateral movement of the indicator or flat (in some sources - Flete). If the market is changing, and the indicator is moving in a lateral direction, this means that the rise or fall of prices is not appropriate to the volume and soon will spread. When trending sideways movement of the index of force could mean early trend reversal.
Divergence. The strongest signal is divergence . About it, we talked a lot and stop on it we do not wake up (who are not familiar with divergence, see the first article on the display).
Further signals are directly connected with the movements, in which a trader makes transactions: short-term or long-term. With short-term traders use the two-day movements of the SS power index (the period set in the settings display in the window "period" set 2), it is considered to be more accurate in signaling. For long-term movements use 13-day (or more) of the SS power index, which gives a broader market conditions.
Short-term Strength Index:
Originally set period 2, which will allow to determine the strength of buyers and sellers in the short term.
Local reversals of trend - as a point of entry into the market. Let's look at an example. The market uptrend. Another indicator shows the growth trend strength. To select the time to enter the market, you need to wait for the power index to cross the middle line from the top to the bottom. In the negative region can enter the market, it is a signal to buy. If the indicator is in the negative area in an uptrend, then the chart is most likely a local minimum, so it is an ideal point to enter into the market. With the downtrend respectively opposite.
For reassurance, if this is not a local minimum, and indeed end of a trend, set stop - loss, to avoid unwanted losses.
The same signals to close the current position is the intersection of the center line. If a trader buys when the indicator is in the negative zone, then he should close the position when the indicator crosses the center line from the bottom up. Accordingly, if a trader sells when the power index is positive, it should close the current position on the intersection of the center line from the top down.
The medium-term Strength Index:
Determination of the current trend. If the indicator line strongly departs from the middle line, which means that the market has a trend, which has the same direction as the line indicator. If the line of the indicator ranges in the midline, is the lack of evidence of a trend and is therefore not recommended to enter the market, as no single indicator can not give accurate signals.
Confirmation of the trend and the signal of the end. Rate trend strength, will power index - the further line of the indicator has moved away from the center, the stronger the trend. If the trend continues to grow, and in light of each new high is below the previous, this means that the trend is no longer valid. This contrasts with a downward trend.
Tips:
For greater effect on a chart, you can use a combination of two power index, but with different periods. So you wake up to date on the situation in the short-term and long-term market. Just this indicator is recommended for use only on the charts big halftime from H4. When working with the indicators should not be confused, because each indicator has its signals and directions of use.
Disadvantages indicator:
The main drawback of this indicator is that it takes to calculate volumes, and as is known in the forex market volumes are replaced by the tick, so this factor may give inaccurate results. Falsity Tick volume is the possibility of non-compliance with the actual volume of trade.
"Force Index" is a good indicator that can provide a complete "picture" of the forex market. Despite the likelihood of false calculations, the indicator will still give accurate signals, and the use of synchronous power index with different periods will reduce the probability of error of 0.001 percent.