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Welcome to the next indicator study.  This research represents an investigative look into how and why some indicators work and some don’t work as well.

New Versus Old

Finding quality volume indicators has always been a challenge for traders.  More often than not, many volume indicators are modeled after the GRAB (Green, Red, and Blue) style histograms.  For a more in depth explanation of GRAB indicators, check out the blog on Types of Indicators.

In this indicator study, we’re going to examine the Trend Direction Force Index Indicator.  Developed by psychologist and trader Alexander Elder, it was first published in his 1993 book, “Trading for a Living”.  This indicator is an oscillator that swings between 1 and -1 and can be qualified as a zero cross by combining both price movement and volume.  It has the added advantage of displaying a neutral zone where no bull or bear “force” exists and the market has no distinct direction.  This area is between -0.05 and +0.05 as noted on the indicator levels.  This is a below chart, or “sub chart” indicator, which helps keep the view of your chart less cluttered.

The math behind the indicator is relatively simple:

Force Index (number of periods) = [Close (current period)  –  Close (prior period)] x Volume

Mr. Elder suggested a default value of 13 for the number of periods.

Why Market Volume

As we’ve mentioned before, Forex market volume has always sparked debate among traders.  Considering that all trades do not clear through one central location, such as Futures or Stocks, the volume you see is not true volume of the world market.  Practically speaking, however, the data your broker has is a close enough representation of what the entire market is currently experiencing and therefore sufficient for trading purposes.

Why Bother With Volume

Without volume, markets don’t have the “fuel” they need for price to trend, and instead will whip up and down without any sustained direction.  Unfortunately, traders ignore market volume simply because they do not understand it.

Volume Indicator

A “volume indicator” falls into the category of indicators that serve as a final checkpoint after the baseline and confirmation indicator conditions have been met (see the blog on Hull Moving Average for a baseline indicator HERE or the non-lag MACD indicator blog for a confirmation indicator HERE) when setting up your algorithm.

Advantages

Trading volume assists the trader when confirming a trend. If trading volume increases, prices generally move in the same direction and can provide a heads-up if volume diminishes.  Once volume begins to diminish, a reversal or ranging market may be in the near future.  What makes this indicator so easy to use is;

Color coded for easy signal identification

Neutral zone indicates a sideways market

Very Good Looking

Below isa screenshot of what the indicator looks like on the daily time frame.  Note that we’ve changed the color of the candles to white to remove any emotional bias so that only the indicator is prominent.

How it’s Used

There are three conditions of the indicator.

Green – market is trending up; long signal

Gray – market has no particular trending direction; no signal

Orange – market is trending down; short signal

See the marked up chart below.

Settings

Below, are the default settings.  We’ll go through each one to describe what its function is.

Time frame to use:  Leave this on the default value.  You can change it to whatever specific time frame you are using, but you’ll have to make adjustments if you flip between different time frames.

Period of calculation:  Similar to the number of periods in a moving average, this specifies how many periods to use in the calculation of the indicator.

Averaging Type:  Specifies the particular type of moving average, including any of the following in the list below (EMA – Exponential Moving Average is the default moving average type used).

Price to Use:  Specifies which data set of prices to use.  The “Close” price is the default set; however, the following are available to use.

Trigger Up Level:  This is the oscillator level which signals an upward trend in price, or a long signal.  The default level is 0.05.

Trigger Down Level:  This is the oscillator level which signals a downward trend in price, or a short signal.  The default level is -0.05.

Smoothing Length:  By increasing the smoothing length, the signal line is less responsive to price change and its appearance is smoothed to remove some peaks and troughs.  Below is a comparison of the default value of 5.0 and an altered value of 20.0.  We’ve left it on the default value for our testing purposes.

Smoothing Phase:  By increasing the smoothing phase, the amplitude (height) of the curves is very slightly exaggerated.  Below is a comparison of the default value of 0.0 and an altered value of 100.0.  You’ll notice that there are very minor differences, and should remain on the default value.

Change the color on the zero line cross:  This setting provides you the opportunity to use the zero line (instead of the 0.05/-0.05 zone to facilitate the change in color.  The default value is “false”, meaning that the color of the indicator will change when it is outside the neutral zone.

The next six settings are various notification alerts for visual, audio, email and textingChange them as you see fit.

Interpolating method when using multi time frame mode:  This setting allows the trader to view multiple timeframes at once on a single chart.  The default setting is “linear interpolation”, meaning that the indicator adjusts for the specific time frame, your chart is currently displaying.  Leave it on the default value.

COMPREHENSIVE TESTING RESULTS ACROSS

CURRENCY PAIRS, BITCOIN, AND GOLD ARE IN

PROCESS AND WILL BE AVAILABLE WHEN THIS

INDICATOR IS HIGHLIGHTED ON THE NNFX CHANNEL

BY VP.

Resources

As we did with previous indicator studies, we’ve made the ADX indicator available for download on our site from the indicator library, if for whatever reason you don’t have it on your platform.  We will keep adding better indicators with each study for your use, at no charge.  When you’re ready to get it, click HERE.

More to Come

There’s a lot more to come.  If you haven’t signed up on our contacts page or subscribed to the YouTube channel, please consider doing so to receive notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to becoming a better trader.

And now, you may be aware of an older indicator that is now more efficient.  There are newer ones which we will explore in future blogs and videos.  Stay tuned!

Our only goal is to make you a better trader.

 

BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments.  It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.