True Strength Index: How To Use TSI

Introduced by William Blau in “Stocks & Commodities Magazine,” the True Strength Index (TSI) is regarded as a double smoothing momentum oscillator based on multiple price changes. The steps for calculation are a tad bit lengthy, but overall the day trading indicator works quite well.

To better understand the True Strength Index or TSI, we need to identify two of these remove terms first.

Oscillators

  1. In technical analysis, Oscillators are momentum indicators. Their fluctuations are delimited by upper and lower bands of price determines.
  2. When the values of the oscillator come within reach of those bands, the signals they provide may be of being over-bought or over-sold.

Signal Lines

  1. Signal lines are used in multiple ways for various indicators. Still, characteristically when the indicator crosses above the signal line, it is thought to be bullish for the price, and when it crosses below the signal line, it is believed to be bearish for the price.
  2. A signal line is universally known as a “trigger line.”

What exactly does TSI do?

  1. When the indicator diverges with price, it signals that the price trend is weakening and may turn around soon.
  2. The True Strength Index may also vary between negative and positive territory. Positive signals that the bulls are more in control of the asset than the bears, whereas negative signals denote otherwise.
  3. We mentioned the signal line earlier, which can be applied to this TSI indicator. When the True Strength Index crosses over the signal line, it can be used as a buy signal, and vice versa, when it goes below it. These types of crossovers are persistent and must be used to a certain extent, with caution.
  4. One must also keep in mind that the overbought and oversold levels may be different depending on the assets that are being traded.

How is TSI calculated?

The True Strength Index has three parts: the double smoothed price change, the double smoothed absolute price change, and the True Strength Index formula.

  1. First, we calculate the price change from one period to the next.
  2. Second, we calculate an exponential moving average over a 25-period.
  3. Third, we now calculate a 13-period EMA of this 25-period EMA to create double smoothing.
  4. The same double smoothing technique can be used for the absolute price change as well.
  5. After these initial calculations, the double smoothed price change is divided by the absolute double smoothed price change, to be finally multiplied by 100.

How to Calculate the True Strength Index?

The ability required in computing the TSI is the ability to calculate an EMA.

So, what’s an EMA?

The Exponential Moving Average is a technical chart pointer that tracks the price of an investment over time and gives utmost importance to recent price data.

Now let’s move on to the calculation,

  1. Calculate the price change 25-period EMA and the absolute price change 25-period EMA.
  2. Smooth both of these EMAs’ by applying a 13-period EMA to each one of them.
  3. Calculate True Strength Index value by plugging the now double-smoothed price change and double-smoothed absolute price change into the TSI formula.

What Does the TSI Imply?

The indicator is used to spot overbought and oversold conditions in an asset’s price point, identify the direction of the trend and changes through the centerline, spot out divergence, and highlight short-term price momentum with signal line crossovers.

Since it is based on the movement of price, oversold and overbought levels differ by the specific asset that is being traded.

The TSI levels, when extreme, can be marked on the asset being traded to observe where overbought and oversold is. ‘Oversold’ does not always mean that it is a good time to buy, and ‘Overbought’ does not denote a good time to sell anyway.

An oversold market is one where the prices are expected to go higher, whereas an overbought market is possibly denoting a sharp decline.

The TSI range for stocks with lower volatility will be smaller and larger for stocks with higher volatility.

Let’s talk about specific signals.

Centre Line Crossover

The centerline crossover signal is the most clarified one. When the True Strength Index is above zero levels, the double smoothed momentum of price change is positive and negative when below zero levels. When the True Strength Index is positive, the prices are generally intensifying and declining when TSI is negative.

Signal Line Crossovers

Finally, stricture in the True Strength Index setting is the same signal line, which is merely a vastly moving average of TSI. Signal line crossovers are among the most common signal indicators, which means that they considerably differ in their actions and meanings. One may increase the settings for the price chart change to reduce noise and signals further.

How do TSI and MACD Differ?

TSI may be a smoothing price change to make a technical oscillator. On the other hand, the MACD (Moving Average Convergence Divergence) indicator measures separation amid two moving averages. Both indicators are used for trading purposes, but they are not calculated in the same manner, so they provide dissimilar signals at different times.

Conclusion

The True Strength Index or TSI, is an exceptional indicator for trend trading. The double smoothing reduces the number of signals and two exponential moving averages lessens the further disturbance or noise and produces an oscillator effect that can track price sensitivity better.

Furthermore, trend lines, support lines, and resistance lines can even be drawn on the TSI.

The True Strength Index belongs to the technical indicators giving a clue about the potential trend direction. The momentum indicator can be used to generate trading signals or to find arguments about a market bias. A signal line crossover is one of the conditions that can be met to create trade signals based on the TSI technical indicator.

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Updated: November 12, 2020

About the author: Alexander is the founder of daytradingz.com and has 20 years of experience in the financial markets. He aims to make trading and investing easy to understand for everybody, and has been quoted on Benzinga, Business Insider and GOBankingRates.