Momentum is negative when the oscillator is negative (pointing to a bearish market bias). Momentum is positive when the oscillator is positive (pointing to a bullish market bias). The TSI has a signal line, which is usually a seven- to 12-period EMA of the TSI line. A signal line crossover occurs when the TSI line crosses the signal line.
- This consolidation resembled a falling flag and TSI broke above the trend line in late July.
- References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c).
- One of the best ways of using the True Strength Index in day trading is, as usual, to combine it with other indicators.
I marked the same bar on the price data so you can see where you could have sold the market. The market has a nice sell off after which you could have potentially captured. If you take a look at the blue arrow on the chart below, you can see that price made a higher high. At the same time, the TSI did not and the Red arrow shows the lower high made at the same time. This is divergence – where one item goes in one direction and the other item goes the opposite way. This divergence is the setup indicating that even though price was increasing, it was doing so with less strength.
Calculate True Strength Index (TSI)
This is the TSI line and a final 7 period exponential average is taken of the TSI to give us the signal line. The True Strength Index (TSI) is an oscillator that fluctuates between positive and negative territory. As with many momentum oscillators, the centerline defines the overall bias.
The True Strength Index (TSI) is a momentum oscillator that ranges between limits of -100 and +100 and has a base value of 0. While it is always a good idea to wait for the True Strength Index to cross above or below the zero line, there are alternative methods for identifying trade signals. As you can see on the example chart, as soon as the True Strength Index crossed above the zero line, the price began moving in an impulsive fashion. Once you are long the trade, you might wonder if you should keep the position open or close it with a small profit. If this was a strong candlestick, you may have enough conviction to hold onto the position.
Bullish TSI Signal Line Cross
This means it can be applied to any time frame with the same expectation in interpretation. I have previously mentioned there is an entire book on the use of this indicator and its many interpretations. I’m going to show you one way I use this indicator to time entries into the market.
Using it when the price is moving sideways or consolidating is not ideal. Most traders use it to identify potential oversold and overbought levels. Others use it to find centreline crossovers while others use it to identify bullish and bearish divergencies. Please keep in mind if you change the periods in the true strength index settings, the indicator will respond to price action accordingly.
The True Strength Index (TSI) vs. the Moving Average Convergence Divergence (MACD) Indicator
The bulls have the momentum edge when TSI is positive and the bears have the edge when it’s negative. As with MACD, a signal line can be applied to identify upturns and downturns. Signal line crossovers are, however, quite frequent and require further filtering with other techniques. Chartists can also look for bullish and bearish divergences to anticipate trend reversals; however, keep in mind that divergences can be misleading in a strong trend. Just like trend lines, you can also draw horizontal support and resistance lines on the True Strength Index.
As with all indicators, TSI signals should be confirmed with other indicators and analysis techniques. Developed by William Blau and introduced in Stocks & Commodities Magazine, the True Strength Index (TSI) is a momentum oscillator based on a double smoothing of price changes. Even though several steps are needed for calculation, the indicator is actually pretty straightforward.
Why Should Traders Try the Chande Momentum Oscillator?
The True Strength Index (TSI) is a unique indicator based on double smoothed price changes. The double smoothing with two exponential moving averages reduces the noise and produces an oscillator that tracks price quite well. In addition to the usual oscillator signals, chartists can often draw trend lines, support lines and resistance lines directly on TSI. These can then be used to generate signals based on breakouts and breakdowns.