New methods of analysis and market research appear in a field of the binary options’ trading constantly. The new binary options’ indicators appear regularly too. Russian emigrant Alexander Elder is one of the modern creators of the new indicators’ generation. The Force Index belongs to this generation too. Its essence consists in the fact that it shows the force of buyers, who stand behind the certain market’s movement on every ascending stage, as well the force of sellers on every descending stage.
Description of Elder’s Force Index (EFI)
The Elder’s Force Index binary options’ indicator is composed of all modern components, which provide detailed information regarding a market. The moving average is applied for smoothening of results. In a result of calculations conducted by the binary options’ indicator, it is possible to make a confident conclusion regarding either the bullish or the bearish force. The smoothening allows avoiding the false signals, and it makes trading more predictable. This binary options’ indicator is considered to be one of the best. Showings of the price and volumes are united to the single value within this indicator.
The calculation of the Force Index is carried out by deduction of the previous closing level from the current one. The received result is multiplied by a volume. If the closing level of the current period is higher than the closing level of the previous one, the market’s force will be positive. Otherwise, it will be negative. In other words, assessment of the market’s force is based not only on the amount of movements and its direction, but also on its volume. If the difference between the current price and the previous one price is the same, then the absolute value of market’s force will be higher and with larger volumes. And it means that the Force Index will be the same for both strong price oscillations with small volumes and weak price oscillations with large volumes.
Basically, the Elder’s Force Index binary options’ indicator uses volumes and the change of the price levels compared to the previous closing prices. It is needed in order to determine the force which moves a market in the current situation. In other words, the difference between the current closing price and the previous closing price determines the value of an advantage between the buyers’ and the sellers’ groups. The volume is added to the results of calculations to make them as accurate as possible.
Therefore, if the Elder’s Force Index binary options’ indicator grows, the buyers prevail in the market. And if the indicator declines, then the sellers prevail in the market currently. This Index includes the exponential moving average. The periods 2 and 13 (which are recommended by the indicator’s author) are used for smoothening by default. However, traders may choose a longer period for smoothening too. At the same time, the indicator can help to determine the change of the long-term trends.
When there is the ascending trend, prices grow only if the volume is strong. And if the moving average with 13 periods grows to its maximum, it means that the growing trend is confirmed. In other words, if the Elder’s Force Index reaches its maximums, then it is more likely that the bullish trend will continue. When the ascending trend starts to exhaust, then the moving average with 13 periods shows the lesser maximums and, finally, crosses the centre line from down to up. It means that the trend changes to the descending one.
Usage of Force Index in binary options
In the first part of this article about the Force Index binary options’ indicator we have considered the description of this auxiliary tool. But in order to work with this indicator, it is needed to know how to use it. The simplest variant to use the indicator is to buy the Call option, when the exponential moving average is located in the negative zone, and to buy the Put option, when the exponential moving average is located in the positive zone. But this variant is not fully applicable in order to make the binary options’ trading profitable. This is because the main principle of the market’s trading consists in the fact that you have to open position only within the current trend.
The author of the Force Index binary options’ indicator proposes to use the moving average with 13 periods. It appears to be the indicator with a longer term. It is assumed that when this line crosses the neutral line from up to down, the buyers’ force will almost exhaust. And if this line enters the negative zone, sellers start to prevail in the market. In addition, the divergence between the current prices and the moving average with 13 periods can also be considered for trading. If there is the bullish divergence, in other words, if the indicator’s maximums grow and prices continue to decline, we can conclude that the market will reverse soon. The same is applicable to the bearish divergence.
If the Force Index binary options’ indicator stays in the sideways movement, it may also provide a trader with the valuable information. The flat, which can be seen on the Force Index binary options’ indicator, may indicate that the volumes do not confirm the growing or the declining market. In other words, the current trend in the market doesn’t have a strong force and can reverse at any time. In addition, if the binary options’ indicator shows large volumes and the prices change insignificantly, it also may send the signal that the market will reverse in the nearest time.
It is important to know what kinds of movements are researched by a trader. If a trader applies the Force Index binary options’ indicator to work with the short-term trend, he has to pay more attention to the moving average with the 2-day period. And those who are going to carry out the long-term trading with the expiration time from one week and more have to pay attention to the moving average with the 13-day period. This one shows the most probable possibility of the mid-term and the long-term trends to continue, and it can be taken into account to make the trading decisions.
As mentioned above, the two-day moving average is the short-term showing in the Force Index binary options’ indicator. The exponential moving average with two periods is the most sensitive force index of buyers and sellers, and it is displayed in the form of the histogram on the indicator’s chart. If this exponential moving average crosses the neutral line from down to up, it means that the market will be controlled by the bulls in the short term. In this case, it is recommended to buy the Call binary options. On the other hand, if this line is located in the negative zone, sellers prevail in the market. In this case, you can buy the Put binary options. We will consider the short-term and the long-term Force Indexes in the next section of this article.
Short-term Force Index
The short-term exponential moving average helps a trader to find points for the purchase of binary options. Signals which appear during the retracement of the main market movement can be referred to these points. The effectiveness of the Force Index binary options’ indicator can be increased dramatically if you use it together with the other auxiliary tools, which go after a trend. For example, if the moving average with two periods starts to decline, you can use another trend indicator that will help to find other points to buy the Call binary options. If the trend indicator shows that the current trend in the market is descending and the moving average with two periods shows growth, then it is the additional signal to buy the Put options.
When you look for a retracement within the ascending trend, it is needed to wait until the time when the two-day exponential moving average will emerge in the negative zone. This point may mean the formation of the local minimum of the mid-term perspective, and you can buy the Call options from this point. But it is needed to take into account that the best options to buy in this situation are the options with the mid-term expiration time because you may suffer a loss using the short-term expiration.
If the exponential moving average of binary options with two periods emerges in the positive zone during the strong descending trend, a pretty strong signal to sell appears in the market. It is assumed that the market reaches its short-term maximum at this time and will continue its descending movement in the nearest time. In this case, a trader can buy the Put option with the mid-term expiration.
If a trader already has opened positions within the current long-term trend, he can buy the additional binary options depending up the situation. In order to do this, he may also look for the retracement zones within a given market’s trend. For example, if there is the ascending movement in the market, you can buy the Call binary options at any time when the Force Index binary options’ indicator or rather its exponential moving average with two periods emerges in the negative zone. If the descending movement prevails in the market, emerge of the exponential moving average with two periods in the positive zone will indicate that the purchase of the Put options is possible.
Considering the long-term and the short-term perspectives, we may pay attention to other signals too. For example, if the short-term moving average falls for the certain amount of candles (20, 30, and more), it may show that the sellers prevail in the market. Therefore, the descending trend has a higher probability to continue. To the contrary, if the moving average with two periods grows for a long time and turns out to be near the maximum values, we can say that the sustained ascending trend is occurring, and, likely, it will continue in the future too. In other words, you can consider the Call options’ purchase.
The divergence with an indicator can be occasionally seen on the binary options’ chart. If the bullish divergence appears, the binary options’ trader can buy the Call options. This signal is pretty strong. The price on a chart forms the new minimum at this time. The moving average with two periods forms the new minimum too, but it appears to be higher than the previous one. The opposite situation occurs during the formation of the bearish divergence. The new maximum of price on a chart is confirmed by the new maximum of the indicator, but, at the same time, this indicator is located below the previous extreme point. In this situation, it is recommended to buy the Put option.
Mid-term and long-term Force Index
We have considered the exponential moving average with two periods of the Force Index binary options’ indicator in the previous section. And that moving average is the short-term one. But many traders prefer the mid-term and the long-term binary options trading, which has the expiration time from one week and more. For this reason, we will consider the exponential moving average with 13 periods (this moving average is represented on our binary options’ chart as the line by default).
As well as the short-term moving average with two periods, the short-term with 13 periods shows the force of sellers and buyers. If it is located above the neutral line, it shows that the bulls are prevailing in the market currently. And if the line appears below the neutral line, it shows the bearish domination in the market. If the mid-term exponential average of the Force Index binary options’ indicator emerges near the neutral line and doesn’t move up or down for a long time, it means that the sideways movement with no domination of buyers and sellers is currently observed in the market. In this case, no signals in the market exist, so the best decision is to refrain from purchase of binary options.
Attainment of the new extreme points by the moving average with 13 periods can be referred to the confirmation signals of the trend’s force in the market. If the trend is ascending, the attainment of the new maximum by this mid-term line shows that the buyers dominate in the market, and it’s most likely that the movement up will continue. In this case, traders are recommended to buy the Call binary options. But sometimes there can be the situations when the new maximums become higher than the previous, volumes in the market decrease, and a price continues to grow. As a result, an indicator crosses the neutral line from up to down. It shows that the buyers’ force is declining and it is most likely that the trend will change to the descending one. It is necessary to note that the farther the indicator’s line from the neutral line, the stronger trend in the market exists.
When we consider signals, which may be sent by the indicators’ and the price chart’s divergence, it is necessary to mention that they belong to a pretty strong signals too. If showings of the moving average with 13 periods constantly indicate the new maximums, which appear to be lower than the previous ones, and a price continues to grow, then there will be the reversal point of the trend soon. Such divergence belongs to the bearish type. The opposite occurs when the lower minimums of a price chart are accompanied by the higher minimums of the moving average with 13 periods. In such situation, sellers start losing a control over the market and the possibility of the change from the bearish to the bullish trend will appear soon. If the divergence is bullish, traders are recommended to buy Call options. And during the bearish trend they are recommended to buy the Put options.
We can determine, whether the descending movement will continue in the market, only when a price reaches the new minimums and, at the same time, line of the Force Index binary options’ indicator with 13 periods appears near the new minimums too.
The Force Index binary options’ indicator has almost no disadvantages. But if traders trade with the Forex options, they have to be careful because the international currency market doesn’t have those volumes which are peculiar for other markets (only tick). Therefore, you have to be more careful with signals of this indicator in such situation.