24. Elder's Force Index (EFI)

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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.

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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.

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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.

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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.

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5. How is EFI calculated or derived?

1. Subtract the previous close from the current close.

2. Multiply the result by the current period’s volume.

3. Optionally smooth the result using a 13-period EMA.

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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.

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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.

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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.

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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.

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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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