Elder's Force Index (EFI)

Definition

Elder's Force Index (EFI) measures the power behind a price movement using price and volume. The indicator can also be used to identify potential reversals and price corrections. The EFI is an oscillator that fluctuates between positive and negative values, above and below a Zero Line. Alexander Elder, the indicator's creator, believed that there are three components to a security's price movement. Those three components are: direction, extent and volume. All three of these components are combined by the EFI to generate the oscillator.

History

Elder's Force Index (EFI) was created by the famed professional trader and psychiatrist Alexander Elder. The indicator was introduced in his book Trading For a Living: Psychology, Trading Tactics, Money Management which was published in 1993.

Calculation

(CurrentPeriodClose - (PreviousPeriod Close) X Volume = EFI
13 Period Exponential Moving Average of EFI = EFI (13)

The basics

The Elder Force Index (EFI) combines the previously mentioned three components. Here is a further breakdown.

1. Direction - A positive change in direction from one period to the next indicates that buys were stronger than sellers. A negative change in direction means that sellers were stronger than buyers.
2. Extent - A big advance in price shows high levels of buying pressure. A big decline in price shows high levels of selling pressure.
3. Volume - High levels of volume shows a strong commitment underlying the price movement.

Essentially, EFI's calculation takes these three components and produces an easily readable visual of the information.

What to look for

Trend Identification

EFI can be used to identify market trend. Different periods of EFI can be used to identify shorter or longer-term trends. Typically, a 13 period EFI can be used for a shorter-term trend. Something like a 100 Period EFI can be used for an intermediate or longer-term trend. Longer period EFI produces a smoother signal than shorter-term EFI.

Divergence

Divergences are a popular signal generated by many different indicators. The same is true for the Elder's Force Index indicator.

Bullish EFI Divergence occurs when price moves lower while the EFI moves higher.

Bearish EFI Divergence occurs when price moves higher while EFI moves lower.

EFI Divergences can be further reinforced by a Zero Line crossover. For example, when a Bullish Divergence is forming, EFI crossing the Zero Line into positive territory could further reinforce a signal of an impending reversal.

Price Corrections

During an uptrend, EFI can present buying opportunities in the form of price corrections. EFI can temporarily drop into negative territory when price dips before continuing the uptrend.

During a downtrend, EFI can present selling opportunities in the form of price corrections. EFI can temporarily rise into positive territory when price bounces before continuing the downtrend.

Summary

The Elder's Force Index indicator (EFI) combines both price action as well as volume to quantify a valuable metric. It is fairly versatile and can be used for a number of things. most notably trend confirmations and trading signals due to divergences and price corrections. That being said, as with most indicators it is best not to use the EFI as a stand-alone signal generator but in conjunction with additional indicators and technical analysis.

Inputs

Length

The time period to be used in calculating the EFI, 13 by default.

Style

Elder's Force Index

Can toggle the visibility of the EFI Line as well as the visibility of a price line showing the actual current value of the EFI Line. Can also select the EFI Line's color, line thickness and visual type (Line is the default).

Zero

Can toggle the visibility of the Zero Line. Can also select the Zero Line's value, color, line thickness and visual type (Dashes are the default).

Precision

Sets the number of decimal places to be left on the indicator's value before rounding up. The higher this number, the more decimal points will be on the indicator's value.