Key Takeaways
- Double-smoothed momentum oscillator measuring trend strength.
- TSI ranges from -100 to +100 for signals.
- Crossing zero line signals bullish or bearish trends.
- Overbought above +25, oversold below -25 thresholds.
What is True Strength Index (TSI)?
The True Strength Index (TSI) is a momentum oscillator that measures the strength and direction of price trends by applying double-smoothed exponential moving averages (EMAs) to price changes. It produces values ranging from -100 to +100, which helps you identify trend momentum, overbought or oversold conditions, and potential reversals.
Developed by William Blau, the TSI filters market noise more effectively than many oscillators, making it useful alongside other indicators like the MACD for confirming trend signals.
Key Characteristics
The True Strength Index offers distinct features that make it valuable for traders seeking clearer momentum insights:
- Double smoothing: Uses two EMAs on momentum and absolute momentum to reduce noise, a technique related to data smoothing.
- Range: Oscillates between -100 and +100, with zero as the centerline indicating bullish or bearish momentum.
- Signal line: An optional 7-period EMA of the TSI can generate crossover buy or sell signals.
- Versatility: Suitable for various timeframes depending on EMA periods, from short-term trading to long-term trend analysis.
- Divergence detection: Effectively highlights weakening momentum when price moves diverge from TSI values.
How It Works
The TSI calculates momentum by first measuring the difference between consecutive closing prices, then applying two layers of EMAs to smooth both the momentum and its absolute value. This double smoothing reduces false signals from short-term volatility.
The final TSI value is the ratio of the double-smoothed momentum to the double-smoothed absolute momentum, multiplied by 100. Traders watch for TSI crossing above or below zero, moving beyond ±25 for overbought or oversold levels, and interacting with its signal line for actionable entries or exits.
Examples and Use Cases
TSI is widely used across different sectors and trading styles to confirm trends and spot reversals. Here are some practical examples:
- Large-cap stocks: Momentum shifts in companies like Delta can be tracked using TSI to time entries amid volatile airline markets.
- Growth stocks: Investors monitoring best growth stocks can use TSI signals to confirm bullish momentum before committing capital.
- ETF trading: Applying TSI to exchange-traded funds helps identify trend strength in diversified portfolios.
Important Considerations
While the True Strength Index offers a refined view of momentum, you should be aware of its limitations. The double smoothing introduces lag, which can delay signals compared to faster oscillators. Combining TSI with other tools like the Ichimoku Cloud or price action analysis can improve decision-making.
Also, the choice of EMA periods affects sensitivity: shorter periods increase responsiveness but may produce more false signals, whereas longer periods provide smoother trends but slower reactions. Adjust these parameters based on your trading style and market conditions.
Final Words
The True Strength Index offers a refined view of price momentum by smoothing out noise and highlighting trend strength. To apply this effectively, integrate TSI readings with your existing analysis tools to confirm entry or exit points.
Frequently Asked Questions
The True Strength Index (TSI) is a momentum oscillator that measures the strength and direction of price trends using double-smoothed exponential moving averages (EMAs) of price changes. It ranges from -100 to +100 and helps traders identify trend direction, overbought or oversold conditions, and potential trading signals.
TSI is calculated by first finding the momentum as the price change between consecutive closes, then applying two stages of smoothing with EMAs to both the momentum and its absolute value. The final TSI value is the ratio of double-smoothed momentum to double-smoothed absolute momentum, multiplied by 100.
TSI values above zero generally indicate bullish momentum, while values below zero suggest bearish momentum. Values greater than +25 may signal overbought conditions, and values less than -25 may indicate oversold conditions, helping traders decide when to buy or sell.
The TSI signal line is typically a 7-period EMA of the TSI itself. Crossovers between the TSI and its signal line generate trading signals: when TSI crosses above the signal line, it suggests a buy opportunity, and crossing below suggests a sell.
Yes, the TSI can help spot trend reversals by highlighting divergences where price highs or lows do not align with TSI highs or lows. Such divergences often indicate weakening momentum and potential changes in trend direction.
Standard TSI settings use a 25-period EMA for the first smoothing, a 13-period EMA for the second smoothing, and an optional 7-period EMA for the signal line. Shorter periods like 13/7 suit short-term trading, while longer periods reduce noise for long-term analysis.
Manual calculation of TSI is complex because it requires multiple EMA calculations on momentum and absolute momentum over historical price data. Most traders rely on charting software like TradingView that automates these calculations for convenience and accuracy.
