24. Elder's Force Index (EFI)
1. What is Elder's Force Index (EFI)?
Elder's Force Index is a volume-based momentum indicator developed by Dr. Alexander Elder. It measures the power behind a price move by combining price change and volume, helping traders assess buying and selling pressure, and confirming trend strength or reversals.
2. Components of EFI?
Price Change: Close (current period) − Close (previous period)
Volume: Total volume for the current period
EFI Formula:
EFI=(Closetoday−Closeyesterday)×VolumeEFI = (\text{Close}_{\text{today}} - \text{Close}_{\text{yesterday}}) × \text{Volume}
Often smoothed with a 13-period EMA to reduce noise.
3. Pros and Cons of Elder's Force Index?
Pros:
Combines price movement and volume, giving a more complete picture.
Detects trend strength and potential reversals.
Helps identify bullish/bearish divergence.
Cons:
Can be noisy without smoothing.
Sensitive to volume spikes (e.g., news events).
Best used in conjunction with other indicators.
4. What is the purpose of EFI in stock analysis?
To measure the “force” behind a price move, i.e., momentum × volume.
To confirm trends or detect early signs of exhaustion.
To help time entries/exits based on the strength of buying/selling pressure.
5. How is EFI calculated or derived?
Subtract the previous close from the current close.
Multiply the result by the current period’s volume.
Optionally smooth the result using a 13-period EMA.
6. When should traders use EFI?
To confirm trend strength during breakouts or breakdowns.
When looking for bullish or bearish divergence against price action.
To spot entry/exit points in combination with moving averages or RSI.
7. What are the limitations or risks of using EFI?
Volume spikes can distort the signal.
May produce false reversals in low-volume markets.
Does not provide clear overbought/oversold thresholds.
8. What are common mistakes when interpreting EFI?
Misreading raw EFI without smoothing.
Ignoring divergence patterns that suggest reversals.
Using EFI in isolation without validating trend or structure.
9. How can EFI be combined with other tools for better accuracy?
Use with moving averages to confirm direction.
Combine with MACD or RSI for momentum confirmation.
Pair with candlestick analysis at key support/resistance zones.
10. How do professional traders interpret EFI differently from beginners?
Professionals:
Focus on EMA-smoothed EFI to avoid noise.
Use EFI to confirm the conviction behind price moves.
Look for divergence setups with volume to anticipate breakouts or fades.
Beginners:
Often trade unsmoothed EFI spikes without context.
Don’t incorporate volume behavior into interpretation.
Miss subtle trend continuation or loss-of-strength signals.
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