True Strength Index (TSI): A Reliable Momentum Indicator
The True Strength Index (TSI) is a momentum-based indicator that helps traders identify trend direction and potential reversals. Developed by William Blau, TSI smooths price momentum to reduce market noise, making it a valuable tool for spotting buying and selling opportunities in stock, forex, and crypto trading.
How the True Strength Index Works
The TSI is derived from double-smoothed moving averages of price changes, making it more reliable than traditional momentum indicators like the Relative Strength Index (RSI). By observing the True Strength Index (TSI), traders can determine the movement above and below a centerline (zero), indicating bullish or bearish momentum.
The formula for TSI is:
Where:
- EMA = Exponential Moving Average
- Short and long periods (e.g., 13 and 25) are typically used for smoothing.
How to Use the TSI Indicator in Trading
1. Identifying Trend Direction
- TSI Above Zero: Indicates a bullish trend, suggesting buying opportunities.
- TSI Below Zero: Indicates a bearish trend, suggesting selling opportunities. The True Strength Index (TSI) provides clear insights into the prevailing trend direction.
2. Spotting Buy & Sell Signals
- Bullish Crossover: When TSI reaches above its signal line (a short EMA of TSI), it suggests a buy signal.
- Bearish Crossover: When TSI crosses below its signal line, it suggests a sell signal.
3. Detecting Overbought and Oversold Conditions
- Above +25: The asset may be overbought and due for a pullback.
- Below -25: The asset may be oversold and due for a bounce due to TSI signals.
4. Identifying Divergences
- Bullish Divergence: Price makes a lower low, but TSI makes a higher low, indicating a potential upward reversal seen through the True Strength Index.
- Bearish Divergence: Price makes a higher high, but TSI makes a lower high, signaling a possible downtrend.
Advantages of the True Strength Index
✔ Reduces market noise for clearer trend identification.
✔ More reliable than traditional momentum indicators like RSI.
✔ Effective for short- and long-term trading strategies.
✔ TSI helps traders spot early trend reversals through divergence analysis using these indicators.
Conclusion
The True Strength Index (TSI) is a powerful momentum indicator that provides smooth and accurate trend signals. It works well in combination with other indicators like Moving Averages, MACD, and Bollinger Bands to refine trading decisions. However, traders should always incorporate proper risk management to avoid false signals.
