What Is the True Strength Index (TSI)?

What Is the True Strength Index (TSI)?

Let me explain the True Strength Index, or TSI, directly to you. It's a technical momentum oscillator that we technical analysts use to spot trends and reversals in the market. You can rely on it to determine overbought and oversold conditions, signal potential changes in trend direction through centerline or signal line crossovers, and alert you to trend weakness via divergence.

Key Takeaways

Here's what you need to know about the TSI. It's a tool for identifying market trends and reversals. The indicator moves between positive territory, which is bullish, and negative, which is bearish. If it diverges from the price, that could mean the trend is weakening and might reverse. A crossover above the signal line suggests a buy, while below indicates a sell. Remember, overbought and oversold levels differ depending on the asset you're trading.

Formula and How to Calculate the True Strength Index (TSI)

Calculating the TSI involves a specific formula, and I'll walk you through it. The core equation is TSI = (PCDS / APCDS) x 100, where PC is the price change (current close minus prior close), PCS is the 25-period EMA of PC, PCDS is the 13-period EMA of PCS, APC is the absolute price change (absolute value of current close minus prior close), APCS is the 25-period EMA of APC, and APCDS is the 13-period EMA of APCS.

To compute it, you need to handle exponential moving averages. Start by recording price changes and absolute price changes, then calculate a 25-period EMA for each. Next, smooth those with a 13-period EMA. Finally, plug the double-smoothed values into the formula to get the TSI.

How the TSI Works

Technical analysis is a strategy some traders like me use to find entry and exit points by studying past performance and predicting future directions. We employ tools like the TSI, created by William Blau in 1991.

The TSI acts as an oscillator measuring the strength and direction of price movements over time. You use it mainly to spot overbought and oversold conditions in an asset's price. It also helps detect divergence, identify trend directions and changes via the centerline, and highlight short-term momentum with signal line crossovers.

Since it's based on price movements, those overbought and oversold levels vary by asset—some might hit +30 or -30 before reversing, others +20 or -20. On your charts, mark extreme TSI levels for the specific asset to identify these points. Watch for additional signals before trading; for instance, wait for price or TSI to drop before selling in overbought areas, or look for signal line crossovers.

Keep in mind, just because something is oversold doesn't mean you should buy immediately, and overbought doesn't automatically mean sell.

How to Interpret the TSI

You can interpret the TSI through levels, crossovers, and divergence. Let me break it down for you.

Signal Line Crossovers

The TSI includes a signal line, typically a 7- to 12-period EMA of the TSI itself. A crossover happens when the TSI line crosses this signal line. If TSI crosses above from below, consider it a potential buy signal for a long position. If it crosses below from above, that might signal selling or shorting.

These crossovers happen often, so use them with other TSI signals. For example, favor buys when TSI is above the centerline (zero), or sells in overbought territory.

Centerline Crossovers

Another signal is the centerline crossover. Momentum is positive above zero and negative below. Some traders use this for directional bias—if above, they might only take long positions; if below, only shorts.

Breakouts and Divergence

Use TSI support and resistance levels to spot breakouts and momentum shifts. A break below a trendline might mean continued selling.

Divergence is key: if price rises but TSI drops, that's bearish divergence signaling a possible downside. If TSI rises while price falls, it's bullish divergence hinting at upside. Divergence isn't great for timing, so combine it with other signals.

Always use TSI with other analysis like price action or indicators.

The TSI vs. the Moving Average Convergence Divergence (MACD) Indicator

TSI is one tool, but compare it to MACD, which traders also use for trends and patterns. They're similar in purpose but calculated differently—TSI smooths price changes into an oscillator, while MACD measures separation between two moving averages. They'll give signals at different times.

Limitations of the TSI

Be aware of TSI's downsides. It often gives false signals where price doesn't follow the expected action. In an uptrend, it might cross below centerline multiple times, but price keeps rising. Signal line crossovers are frequent and may need filtering. Sometimes TSI changes direction without price following, leading to losing trades. Divergence can drag on without providing clear reversal timing and isn't always present during actual reversals.

Who Created the True Strength Index?

William Blau created the TSI and introduced it in Stocks & Commodities magazine in November 1991. He described it as a smooth momentum indicator without high-frequency noise, useful for market trend directions.

What Is Technical Analysis?

Technical analysis is a discipline where we use tools, historical data, charts, and indicators to spot patterns and predict asset or market movements. It's the opposite of fundamental analysis, which focuses on intrinsic value from financial and economic factors.

How Do You Calculate the True Strength Index?

To calculate TSI, record price and absolute price changes, compute 25-period EMAs for both, then apply 13-period EMAs to smooth them further.

The Bottom Line

In summary, the TSI helps you identify market trends, signals, and patterns. Use the formula to calculate it, but do your research before incorporating it into your strategy. Combine it with other tools to reduce risks and align it with your goals.