EFI (Elder Force Index)

The Elder Force Index (EFI) is a technical indicator developed by Alexander Elder that measures the power behind price movements by combining price changes and volume. It helps traders identify potential trend reversals, confirm price movements, and spot divergences between price and volume.

Formula

Force Index = Volume × (Current Close - Previous Close)
EFI = EMA(Force Index, n)
Where:
EMA = Exponential Moving Average
n = Number of periods (typically 13)

How EFI Works

The Elder Force Index combines three essential elements of market information: direction of price change, extent of price change, and trading volume. A positive Force Index indicates buying pressure, while a negative value suggests selling pressure. The EMA smooths out the raw Force Index values to provide clearer signals. The indicator helps identify potential reversals when there are divergences between price and the Force Index.

Trading Strategies Using EFI

Strategy Examples

Enter long positions when EFI crosses above zero with strong volume
Enter short positions when EFI crosses below zero with strong volume
Look for bullish/bearish divergences between price and EFI
Use EFI to confirm trend strength and continuation
Combine with price action for more reliable signals

Support and Resistance Strategy

Use EFI to confirm breakouts at key support/resistance levels
Look for strong EFI readings at price levels for validation
Monitor volume confirmation at support/resistance zones
Use EFI divergences near key levels for reversal signals
Combine with other indicators for level confirmation

Trend Identification

Use EFI zero line as trend direction indicator
Monitor EFI slope for trend strength assessment
Look for series of higher/lower EFI values for trend confirmation
Use multiple timeframe analysis for trend alignment
Identify trend exhaustion through EFI divergences

Advantages and Limitations

Advantages

Combines price and volume for better market insight
Helps identify potential trend reversals
Useful for confirming breakouts and price movements
Can identify divergences between price and volume

Limitations

Can generate false signals in choppy markets
Requires volume data, not available for all markets
May lag behind price action due to EMA smoothing
Should not be used in isolation for trading decisions

Best Practices When Using Elder Force Index (EFI)

Use multiple timeframes to confirm EFI signals
Combine EFI with other technical indicators for validation
Pay attention to EFI divergences with price action
Monitor volume trends alongside EFI readings
Wait for clear zero-line crossovers before taking positions
Use EFI to confirm breakout strength and sustainability
Consider market volatility when interpreting EFI signals
Look for confluence between EFI and key price levels
Document and track EFI signal effectiveness in your trading
Adjust EFI period settings based on your trading timeframe