# Understanding and Using the True Strength Index (TSI) Indicator

Navigating the financial markets can be tough at times, but the True Strength Index (TSI) Indicator offers a reliable compass to help you along the way.

This post will cover important topics such as understanding the TSI’s mechanics, interpreting its signals, and including it into your own trading strategy.

In This Article

## Why is TSI important?

TSI (True Strength Index) is a useful tool for traders as it provides an unbiased and effective method to measure the intensity of price action. This information can help traders make better decisions about when to initiate or close a trade.

To potentially increase your chances of making a profit, it’s important to understand the overall trend of the instrument and the strength of that trend, particularly if it continues to run.

## Understanding the True Strength Indicator (TSI)

Understanding the indicators you use is important. Although the charting platform does the calculations, learning how the calculations are done can help you better comprehend the indicator’s output.

### Definition of TSI and its Formula

The TSI is calculated using two primary components:

1. Price Change: The difference between the current and previous price of an asset. This measures how much the price has moved.
2. Smoothing: The process of averaging the price changes over a specific period to reduce noise and create a more reliable signal.

Here’s the formula for calculating the TSI:  TSI = (Double Smoothed Price Change) / (Double Smoothed Absolute Price Change)

To calculate the TSI, we calculate the price change and then apply smoothing to both the price change and the absolute price change. The TSI is then calculated by dividing the double-smoothed price change by the double-smoothed absolute price change.

We all know the importance of trends and knowing what the TSI implies is showing us can help us decide whether to trade or not.

### Positive and Negative Momentum

The TSI oscillates around a zero line, which represents the centerline between positive and negative momentum. When the TSI is above the zero line, it indicates positive momentum, and we can assume that we are looking at an uptrend.

When the TSI is below the zero line, it indicates negative momentum, suggesting that the price is in a downtrend.

### Trend Strength

The TSI can also provide insights into the strength of a trend. A larger value of the TSI indicates a stronger trend, while a smaller value suggests a weaker trend. For example, a TSI value of +30 signifies a stronger uptrend than a TSI value of +10.

The TSI can provide important insights into trends by indicating the strength and direction of the price movement.  Here’s what the TSI can tell traders about market trends:

By understanding how the TSI can show the trend direction, traders can use this information to help decide whether to buy or sell an instrument or stand aside.

## TSI vs Other Indicators

Another popular momentum indicator in technical analysis is the Moving Average Convergence Divergence (MACD) Let’s compare both the TSI and MACD to see if one of them is best.

### TSI VS Moving Average Convergence Divergence (MACD) indicator

The Moving Average Convergence Divergence (MACD) is a widely-used momentum indicator that calculates the difference between two exponential moving averages (EMAs) of an asset’s price.

The MACD helps traders identify the price trend, trend reversals, bullish or bearish market conditions, and potential entry or exit points.

Both momentum indicators are valuable tools for analyzing market trends and momentum but there are some key differences between them:

Calculation: While the TSI uses a double smoothing of price changes to measure momentum and offer trade signals, the MACD relies on the difference between short-term and long-term EMAs.

Sensitivity: The TSI is considered to be less sensitive to price movements compared to the MACD due to the double smoothing price formula. This means that the TSI might generate fewer false signals, but it may also react more slowly to sudden price movements.

Interpretation: TSI primarily emphasizes the intensity and trend of price movements, and the MACD helps recognize possible shifts in market conditions and trend reversals. While both indicators can assist in producing trading signals, their methods of doing so are different from one another.

It’s essential to understand that there are no best technical indicators and that no single indicator is perfect or suitable for all trading strategies. Traders often use a combination of indicators, including both the TSI and the MACD, to confirm signals and add confirmation to their trading decisions.

### Using TSI With Average True Range (ATR)

The Trend Strength Index (TSI) measures price movement strength and direction, while the Average True Range (ATR) measures volatility over a given period. Combining these indicators can identify opportunities in trending and volatile markets.

For instance, a high TSI and ATR might signal a strong, volatile bullish trend, where using a trailing stop loss could protect profits while riding the trend.

### Limitations of the TSI

While the True Strength Index is a useful tool for identifying market trends and momentum, it’s essential to be aware of its limitations:

Lagging indicator: Like most technical indicators, the TSI is a lagging indicator, meaning that it is based on historical data and may not always accurately predict future price movements or even current conditions.

False signals: It is less sensitive to price fluctuations compared to some other indicators, but it can still give you low quality signals to trade, especially in highly volatile markets.

No guarantee of success: While the TSI can provide valuable insights into market trends, it does not guarantee success in trading. While this may seem obvious, too many traders focus on technical indicators as the “Holy Grail” of trading.

Understanding the TSI’s limitations and comparing it with other indicators like the MACD can help traders develop a well-rounded trading strategy.

It is important essential to use a combination of technical indicators, price action, market analysis, and risk management techniques to increase your chances of success in trading.

## Using the TSI

This section will explain how to incorporate the True Strength Index (TSI) into your trading strategy. We’ll explore techniques such as using signal line and centerline crossovers, as well as leveraging breakouts and divergence to analyze TSI.

### Signal line and centerline crossovers

When using the TSI, traders often look for crossovers, which can provide trading signals and indicate momentum direction. There are two types of crossovers: signal line crossovers and centerline crossovers.

Signal line crossovers

A signal line crossover occurs when the TSI line crosses a moving average of the TSI. The moving average is typically a 7-day or 9-day exponential moving average (EMA), depending on the trader’s preference and back test results.

Signal line crossovers can indicate potential buying or selling opportunities as it enters positive and negative territory:

1. Bullish signal: When the TSI line crosses above the signal line, it suggests that the asset’s price momentum is increasing, and it could be a good time to buy.

2. Bearish signal: When the TSI line crosses below the signal line, it indicates that the asset’s price momentum is decreasing, and it might be a good time to sell.

Centerline crossovers (Zero line)

Centerline crossovers occur when the TSI line crosses the zero line:

1. Bullish signal: When the TSI line crosses above the zero line, it indicates that the asset’s price momentum is positive, and it could be a good time to buy.

2. Bearish signal: When the TSI line crosses below the zero line, it suggests that the asset’s price momentum is negative, and it might be a good time to sell.

## Breakouts, Oversold/Overbought, Divergence

In addition to crossovers, traders can also use breakouts, overbought and oversold levels, and divergence to analyze the TSI and generate trading signals.

### Breakouts

A breakout occurs when the price moves beyond a predefined level or range. Breakouts can be a sign of a strong trend and potential buying or selling opportunities:

Bullish breakout: When the price moves above a resistance level with a TSI rise, it could signal that the asset’s price is gaining momentum, and it might be a good time to buy.

Bearish breakout: When the price moves below a support level and TSI heads down, it could suggest that the asset’s price is losing momentum, and it might be a good time to sell.

### Oversold and Overbought Conditions

With this trading approach, traders look for extreme readings on the TSI, which can indicate that an instrument is oversold or overbought.

Oversold levels: Any reading below -70 (some will use -50) suggests sellers may weaken and we get a buying opportunity

Overbought levels: A reading above +70 (some will use +50) is a sign that the instrument has extended too far and may present an opportunity to the downside

At these levels, traders will look for some confirmation of a reversal such as a chart pattern or other technical indicators.

### Divergence

Divergence happens when the TSI moves in the opposite direction of the price highlighting a potential change in market bias.

Divergence can be an early warning sign of a potential trend reversal:

Bullish divergence: If the price is making lower lows, but the TSI is making higher lows, it could indicate a potential trend reversal to the upside.

Bearish divergence: If you are seeing price making higher highs, but the TSI is making lower highs, it could signal a potential trend reversal to the downside.

By adding the signal line and centerline crossovers, breakouts, and divergence into your TSI analysis, you can develop a more robust trading strategy that takes advantage of the different market conditions you will face.

## Best Way To Use TSI

When using the True Strength Index in your trading strategy, consider these techniques to maximize its effectiveness:

## TSI for Day Trading

In this section, we’ll discuss how to use the True Strength Index (TSI) for day trading. This will include the best TSI settings for an intra-day strategy

### What are the best settings for a day trading strategy?

When using the TSI for day trading (5 minute chart example), you may want to adjust the settings to be more responsive to short-term price movements. Here are some suggestions for the best settings for a day trading short term strategy:

1. TSI Period: Consider reducing the TSI period to capture short-term price fluctuations. A 5-10 day period might be better for day trading than the default 25-day period.
2. Signal Line: Use a shorter EMA for the signal line, such as a 3-day or 5-day EMA, to generate faster signals.

Remember, the best settings for your trading strategy will vary depending on your trading style and the specific market you’re trading in.

Experiment with different settings and backtest your strategy to find the best settings for your strategy.

## Pros and Cons Of Using TSI

The TSI is a good indicator but like all technical indicators, it does come with it’s share of pros and cons:

When using the TSI for intra-day, keep in mind its pros and cons and consider incorporating other technical indicators and chart patterns into your trading strategy. This will help ensure your strategy is robust and not dependent only on the TSI.

## Conclusion

The True Strength Index (TSI) is a powerful technical indicator that can help day traders and swing traders identify potential buying and selling opportunities in the market. By measuring the strength and direction of price movements, the TSI provides important insights into the trend which could be used to improve your trading strategy.

It’s important to understand both the pros and cons of using the TSI and to combine it with other indicators and chart patterns for a more robust decision-making process. When used correctly, the TSI can be an effective tool in your trading arsenal.

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Author: CoachShane
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.