As a professional trader or investor using Algoine, you have the opportunity to access various technical indicators that can help you better understand market trends and make more informed decisions. One such indicator is Elder's Force Index (EFI). This indicator was developed by Alexander Elder, a trader and psychiatrist who emphasized the importance of psychology in trading.
Understanding Elder's Force Index
EFI is a momentum indicator that measures the strength of market trends. It's designed to help traders determine whether markets are bullish or bearish. The formula for calculating EFI is as follows:
(Close - Previous Close) x Volume
EFI can be positive or negative depending on whether the current closing price is higher or lower than the previous closing price. If the current closing price is higher, and the volume is higher, then EFI will be positive. Conversely, if the current closing price is lower, and the volume is lower, then EFI will be negative.
EFI can be plotted as a histogram, where positive values are shown in one color (usually green), and negative values are shown in another color (usually red). The height of the bars in the histogram represents the strength of the trend.
Using EFI in Trading
EFI can be used in a number of ways to make trading decisions. One common approach is to look for divergences between EFI and price. For example, if price is moving higher, but EFI is moving lower, then this is known as bearish divergence. This could indicate that the market trend is losing strength and that a reversal may be imminent.
Conversely, if price is moving lower, but EFI is moving higher, then this is known as bullish divergence. This could indicate that the market trend is gaining strength and that a reversal to the upside may be imminent.
Traders can also use EFI as a confirmation tool. For example, if there is a breakout to the upside on high volume, and EFI is positive, then this could confirm the strength of the bullish trend. Conversely, if there is a breakdown to the downside on high volume, and EFI is negative, then this could confirm the strength of the bearish trend.
EFI can also be used in conjunction with other indicators, such as moving averages, to further confirm trading signals.
Conclusion
Elder's Force Index is a useful technical indicator that can help traders and investors better understand market trends and make more informed trading decisions. By calculating the strength of market trends based on changes in price and volume, EFI can provide a valuable tool for predicting market movements and identifying potential reversals.
As a user of Algoine, you can easily incorporate EFI into your strategies and use it to generate profitable trades. By understanding the mechanics of this indicator, and incorporating it into your broader trading approach, you can improve your chances of success in the markets.