True Strength Index
Type
Momentum oscillator
Short introduction
The True Strength Index (TSI) developed by William Blau is a double smoothed momentum indicator. Basically, it is an extension of the RSI, with which it shares many characteristics and rules of interpretation. That said, the True Strength Index (TSI) is a "smoother" form of RSI. It aims to make trends and trend reversals visible.
The TSI is displayed in a separate chart.
Statement
The TSI looks at individual price changes (via the momentum) and smoothes them twice. A rising value therefore signals a rising price, a falling value a falling price. Due to the double smoothing, all price outliers are almost completely filtered out.
The indicator is calculated by dividing a double smoothed one-day momentum by the amount of a double smoothed one-day momentum. This result is usually multiplied by 100, so that the course varies between -100 and 100.
Formula/calculation
Double smoothing of price changes:
PC = Current rate minus previous rate
First smoothing = 25D EMA period of the PC
Second smoothing = 13D EMA period of the 25D EMA period of the PC
Double smoothing of the absolute price change:
Absolute price change (PC) = Absolute value of the current price minus the previous price
First smoothing = 25D EMA period of the PC
Second smoothing = 13D EMA period of the 25D EMA period of the PC
TSI = 100 x (Double smoothed price change รท Double smoothed absolute price change)
Signal line: 7-day EMA
where:
PC = Price change
EMA = Exponential Moving Average
The following MA variants can be used for smoothing via the parameters:
- Simple MA (SMA) - Default setting
- Exponential MA (EMA)
- Weighted MA (WMA)
Interpretation
According to William Blau, the primary purpose of the TSI is to find trend reversals in the price trend. Therefore, you should primarily look for divergences between the price and the indicator.
A negative signal is generated when the underlying is still climbing new highs while the indicator is not climbing any new highs. A positive signal is generated when the actual price trend is still establishing new lows but the indicator is no longer establishing new lows.
On the other hand, there is the possibility to calculate an MA for the TSI and to use the intersection of the two lines as a signal generator. A buy signal is given when the TSI indicator crosses its MA from bottom to top, a sell signal when the indicator crosses its MA from top to bottom.
A third possibility is to enter extreme zones, similar to the RSI, such as 70 to 75 and -70 to -75. Leaving the upper extreme range is a sell signal, leaving the lower extreme range is a buy signal.
Default setting
Smoothing period 1: 25 days
Smoothing method 1: EMA
Smoothing period 2: 13 days
Smoothing method 2: EMA
Signal period: 7 days
Signal method: EMA
Overbought: +25
Oversold: -25
Example: TSI
