Elder Force Index (EFI) – What It Is & How to Trade with It

Elder Force Index (EFI) – What It Is & How to Trade with It

What is the Elder Force Index (EFI)?

The Elder Force Index (EFI) is a technical momentum indicator developed by Dr. Alexander Elder to measure the strength of a price movement using volume, price changes, and direction. EFI helps traders identify trend strength, breakout confirmation, and potential reversals.

EFI is calculated using the following formula:
EFI = (Close Price – Previous Close) × Volume

To smooth out fluctuations, a moving average (typically 13-period EMA) is applied to the raw EFI values.

Key Features of EFI

• Measures trend strength based on price movement and volume.
• Helps identify potential breakouts and reversals.
• Works well in both trending and ranging markets.

How to Use EFI in Forex Trading

1. Trend Strength Confirmation Strategy

EFI helps confirm the strength of an ongoing trend:

• Bullish Trend: EFI is above zero and rising.
• Bearish Trend: EFI is below zero and falling.

Recommended Settings:

• Short-term traders: Use a 2-period EFI for quick signals.
• Swing traders: Use a 13-period EFI for smoother trend tracking.

2. EFI Divergence Strategy

Divergence between price and EFI can indicate potential trend reversals:

• Bullish Divergence: Price forms a lower low, but EFI forms a higher low (buy signal).
• Bearish Divergence: Price forms a higher high, but EFI forms a lower high (sell signal).

3. EFI Breakout Confirmation Strategy

EFI can confirm breakouts when price moves beyond a key level:

• Buy Signal: EFI rises sharply above zero when price breaks resistance.
• Sell Signal: EFI falls sharply below zero when price breaks support.

4. EFI with Moving Averages

Pairing EFI with a moving average (e.g., 50 EMA) improves trade confirmation:

• Buy when: EFI is above zero & price is above the 50 EMA.
• Sell when: EFI is below zero & price is below the 50 EMA.

Pros and Cons of Using EFI

✅ Pros:

• Provides valuable insight into trend strength.
• Confirms breakouts with volume-based analysis.
• Effective in both trending and ranging markets.

❌ Cons:

• Can produce false signals in low-volume markets.
• Requires confirmation from other indicators for best results.

Final Thoughts

The Elder Force Index (EFI) is a powerful volume-based indicator that helps traders measure trend strength, identify reversals, and confirm breakouts. When combined with moving averages or divergence analysis, EFI enhances trade accuracy and decision-making.