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The force index is an analytical tool stock traders can use to evaluate trends with individual securities to determine how pressure to buy and sell influences sales activity. Traders can use this information to decide how they want to move in a given market and may establish rules for themselves with the assistance of the force index. As with other analytical tools, it works best when the trader combines it with multiple sources of information to get a complete picture.
To calculate this, the trader will take the most recent closing price for a security or commodity and determine the difference between that and the previous day's. This may be positive or negative. If a commodity is trending upwards, it will be positive, with a higher closing price. The trader multiples the difference in closing prices by the volume of trading to determine the force index.
When the force index trends upwards, it indicates that the market is rising. More volume may be moving, and the price may be rising as well. Conversely, a downward trend indicates less interest and may be a sign that values are bottoming out. Traders typically plot it over time and can watch the index as it moves around a zero line. It is also possible for the force index to stay relatively flat.
Traders commonly use a moving average with the force index to smooth out the values and avoid situations where the numbers conflict with actual market movements. Sometimes prices rise and fall at random, and relying too heavily on uncorrected data can put a trader in a bad position. Moving averages allow traders to smooth out outliers and focus on the underlying market movements. Two and 13 day moving averages are common tools to use with this type of technical analysis for traders.
Roughly, when the force index is negative, it is a sign to buy, while a positive trend indicates a good time to sell. The situation on the ground may be more complicated, and the trader will have to consider other factors before making a move. A flat average, for example, could be a warning sign of a move in either direction, and the trader will need more technical analysis to determine which way the market is likely to move. If she fails to analyze the situation correctly, she may take a loss by buying or selling at the wrong time.