Force Index is an oscillator developed by this author and first described in Trading for a Living. The decision to reveal Force Index was one of the hardest in writing that book. I felt reluctant to disclose my private weapon but remembered how resentful I used to feel while reading books by authors who wrote, in so many words, "Now, of course, you wouldn't expect me to tell you everything," I decided I would write either everything or nothing, and describe Force Index.

The disclosure did me no harm. Force Index continues to work for me as well as it did before. Very few software companies have included it in their systems, and its behavior on my charts hasn't changed. This reminds me of a good friend with whom I served on a ship. He was the biggest smuggler I ever met, but he never hid anything far away. Sometimes he'd put the contraband right on his desk, under the noses of customs officers. Leaving a secret in the open can be the best way of hiding it.

Force Index helps identify turning points in any market by tying together three essential pieces of information-the direction of price movement, its extent, and volume. Price represents the consensus of value among market participants. Volume reflects their level of commitment, financial as well as emotional. Price reflects what people think, and volume what they feel. Force Index links mass opinion with mass emotion by asking three questions: Is the price going up or down? How big is the change? How much volume did it take to move the price?

It is very useful to measure the force of a move because strong moves are more likely to continue than weak ones. Divergences between peaks and bottoms of prices and Force Index help nail important turning points. Spikes of Force Index identify zones of mass hysteria, where trends become exhausted. Here is the Force Index formula:

Force Index = (Close today - Close yesterday ) * Volume today

If the market closes higher today than yesterday, Force Index is positive, and if it closes lower, Force Index is negative. The greater the spread between today's and yesterday's closes, the greater the force. The higher the volume, the more forceful the move.

Force Index is greater when the market moves far on high volume and lesser when the market moves a short distance on thin volume. When the market closes unchanged, Force Index equals zero.

Smooth Is Better We can plot Force Index as a histogram, with positive readings above the zero line and negative readings below. The raw Force Index looks very jagged, up one day, down the next. It works better if we smooth it with an exponential moving average and plot it as a line.

If we smooth Force Index with a long-term EMA of 13 days or longer, it will measure long-term shifts in the balance of power between bulls and bears. To help pinpoint entries and exits, we should smooth Force Index with a very short moving average, such as a two-day EMA.

When the trend of our stock or future is up and the two-day EMA of Force Index declines below zero, it gives a buy signal. When the trend is down and the two-day EMA of Force Index rallies above zero, it gives a sell signal.

The key to using a short-term Force Index is to combine it with a trendfollowing indicator. For example, when the 22-day EMA of price is up and the two-day EMA of Force Index becomes negative, it reveals a short-term splash of bearishness within an uptrend, a buying opportunity. Once long, you have several exit strategies. If you're very short-term oriented, sell the day after Force Index turns positive, but if your time horizon is wider, hold until prices hit their channel line or the EMA turns flat.

When the 22-day EMA of prices is down, and the two-day EMA of Force Index rallies above zero, it reveals a short-term splash of bullishness within a downtrend, a shorting opportunity. If you're very short-term oriented, grab a quick profit and cover the day after Force Index turns negative. If your time horizon is wider, use the lower channel wall for the profit target.

When the two-day EMA of Force Index spikes up or down, exceeding its normal peaks or lows by several times, it identifies an exhaustion move- a signal to take profits on existing positions.

When the trend is up and the two-day EMA of Force Index traces a sharp upward spike, eight or more times above its normal height for the past two months, it marks a buying panic. The bulls are afraid of missing the train and bears feel trapped and cover shorts at any cost. Such spikes tend to occur during end-stages of bull moves. They tell you it is a good time to take profits on long positions. Prices often rally to retest the spike day's high. By then the spirit is gone from the rally and other indicators start developing bearish divergences, warning of a trend reversal.

When the two-day EMA of Force Index traces a sharp downward spike during a downtrend, four or more times deeper than normal for the past two months, it marks an hysterical stage of the downmove. It identifies a selling panic among the bulls, who are dumping their holdings at any price to get out. Such spikes tend to occur at the end-stages of bear moves. They tell you that it's a good time to take profits on short positions. Prices sometimes retest the spike day's low, but by then most indicators are developing bullish divergences and an upside reversal is coming.

Spikes are somewhat similar to the kangaroo tails we discussed earlier (see "The Reality of the Chart" on page 73). The difference between them is that tails are purely price-based, while Force Index reflects volume as well as prices. Tails and spikes identify panics among the weakest players. Once they get flushed out, the trend is ready to reverse.

A Reversal Is Coming Trend reversals do not have to come as a surprise; divergences between Force Index and price usually precede them. If the market is trying to rally, but the peaks in Force Index are becoming lower, it is a sign of weakness among the bulls. If a stock or a future is trying to decline, but the bottoms in Force Index are becoming more shallow, it is a sign of weakness among the bears.

A divergence between an EMA of Force Index and price shows that the trend is ready to reverse. Divergences between the patterns of peaks or bottoms of Force Index and prices show that the trend is becoming weaker. The power of this message depends on the length of the EMA with which we smooth our Force Index. If we use a very short EMA of Force Index, such as two days, its divergences help pinpoint the ends of shortterm trends lasting a week or so. If we use a 13-day or longer EMA of Force Index, we can identify the ends of longer-term moves that last months.

If the trend is up and you are long, take profits when the two-day EMA of Force Index traces a bearish divergence-a lower peak in the indica tor during a higher price in the market. If you are short, take profits when the two-day EMA of Force Index traces a bullish divergence-a higher bottom in the indicator during a lower price in the market. Take your profits and monitor the market from the sidelines. It is cheaper to exit and reenter than sit through a countertrend move.

It is essential to combine Force Index with trend-following indicators. If you use this oscillator alone, it will lead to overtrading because it is so sensitive. In that case, only your broker will make money. The signals of a short-term oscillator must be filtered using a long-term trend-following indicator. This is the key principle of the Triple Screen trading system.