Elder’s Force Index (EFI) is an oscillator that determines the ‘force’ at which the price moves in a particular direction. It was developed by famous phycologist and trader Dr. Alexander Elder and was introduced in his bestselling book Trading for a Living: Psychology, Trading Tactics, Money Management.
According to Elder, there are three primary reasons which cause price movements; direction, extent and volume. The force index oscillator combines all these three factors into one indicator and accurately predicts the market trends.
The indicator fluctuates in positive and negative territory and its magnitude determines the overall power which moves the prices in a particular direction. Essentially it measures the traders’ commitment and conviction for the market. This masterpiece combines the price movement with psychology which is a rare mix.
EFI is in positive territory with higher absolute magnitude when the overall market trend is bullish, while it is in negative territory with higher absolute magnitude when the overall trend is bearish.
This indicator works well in all the timeframes. But you should look at multiple timeframes for extra confirmation of the signal
Also Read: Percentage Price Oscillator AFL Code
Below is the screenshot of the Elder’s force index plotted in an Amibroker chart. There are two variations of the index; EFI(1) which is simply the difference between the current price and previous price multiplied by volume, and EFI(13) which is the 13 periods exponential moving average of EFI(1).
EFI(1) is plotted in white and EFI(13) is plotted in blue.
You can also plot them as histograms as per your convenience.
Elder’s Force Index AFL Download
Download the AFL code for Elder’s force index from the below link:
After plotting the chart title and candlestick chart, EFI(1) and EFI(13) are calculated using the below formulas:
EFI(1) = (Current Close – Previous Close) * Current Volume
EFI(13) = 13 period EMA of ((Current Close – Previous Close) * Current Volume)
EMA = exponential moving average
And then, these lines are plotted on a candlestick chart by using the standard Amibroker “plot” function.
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Long and Short Rules
Here are the long and short rules you can consider while trading through EFI:
- If EFI(13) is in positive territory with higher absolute magnitude, stay long
- If EFI(13) is in negative territory with higher absolute magnitude, stay short
- If EFI(13) breaks out from negative to a positive value, go long
- If EFI(13) breaks out from positive to a negative value, go short
- EFI can also be used to assess the technical divergence between price and indicator. For example- if price makes a higher high and EFI makes a lower high, then the bullishness may be subsiding. And if price makes a lower low and EFI makes a higher low, then the bearishness may come to an end soon
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