What is the True Strength Index (TSI)?
The True Strength Index (TSI) is a technical momentum indicator created by William Blau. It's designed to identify overbought and oversold conditions in a market, and to anticipate potential trend reversals. Unlike many oscillators, TSI attempts to filter out whipsaws by focusing on the *true range* of price movement, rather than just closing prices. It's a versatile tool applicable to various timeframes and asset classes, offering traders insights into the underlying strength of a trend.
How it Works
TSI calculates momentum based on differences between two exponential moving averages (EMAs) of price changes. It uses the true range to normalize the momentum, providing a more accurate representation of price strength. The TSI value oscillates around a zero line, with positive values indicating bullish momentum and negative values suggesting bearish momentum. The indicator's sensitivity can be adjusted through its settings.
Trading Signals
Buy signals are generated when the TSI crosses above the zero line, or when it moves from oversold territory (typically below 20) upwards. Sell signals occur when the TSI crosses below the zero line, or when it moves from overbought territory (typically above 80) downwards. Divergence between price and TSI can also signal potential reversals – bullish divergence when price makes lower lows but TSI makes higher lows, and bearish divergence vice versa.
Basic Settings
The default settings for TSI are typically a 14-period EMA for both the short and long-period calculations. Traders can adjust these periods to fine-tune the indicator's sensitivity. Shorter periods will result in a more reactive TSI, while longer periods will smooth out the signal. The overbought and oversold levels (usually 80 and 20) can also be customized to suit individual trading strategies. This is for educational purposes only, not financial advice.