Elder's Therm and safezone

#11
Hello pksam,

Hope you are having a nice weekend,Excuse me for the delay in posting.
Please drop the shri....This is an extract from Dr. Alexander Elder's book Come Into My Trading Room,Hope you find it useful .

Force Index

Force Index is an oscillator developed by Alexander Elder.

Force Index helps identify turning points in any market by tying together
three essential pieces of informationthe 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.

Force Index formula:
Force Index (Closetoday -Closeyesterday) Volumetoday

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 todays and yesterdays 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 Force Index is plotted as a histogram, with positive
readings above the zero line and negative readings below. It works better if one smooths it with an exponential moving average and plots 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.

IF Force Index is smoothed with short Term 2 day EMA helps pinpointing entries and exits.
When the trend of our stock 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 trend following 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 youre 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 youre 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.

Spikes In the Force Index

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. Its the sign to take profit on the long Positions. Prices often rally to retest the spike days 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 down move. 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 its a good time to take profits on short positions. Prices sometimes retest the spike days low, but by then most indicators are developing bullish divergences and an upside reversal is coming.
Spikes are somewhat similar to the kangaroo tails. 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
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 is trying to decline, but the bottoms in Force Index are becoming shallower, it is a sign of weakness among the bears.

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 short term 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 divergencea lower peak in the indicator during a higher price in the market.
If you are short, take profits when the two-day EMA of Force Index traces a bullish divergencea higher bottom in the indicator during a lower price in the market. Take your profits.

With Regards

Roneeth
 
#12
Dear Roneeth,

Thank you very much for all that information on Dr. Elder's Force Index. It is so comprehensive.

The excerpt, "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." has to be etched in stone.

Thank you, once again.

pksam
 
#13
yes,

any argument shall be supported with facts. merely saying crap is not a good culture.

Satya
in fact the elder's safe zone is a system of break of volatility. The main odds is that you must put a very tight stops. You can use it for entries and/or for exits but , as usual, the core of your system will be the money management. If your expectancy is positive you can win money , if not, no management system can save your portfolio. for the safe zone, if you use it for entry, wait a bar completely out of the limit, and for the stop exit only if the extremum of the bar which crosses the line is broken. Only a small tip.
 

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