How To Use True Strength Index (TSI) Indicator To Make Better Trades

There are quite many indicators that can be used for entry signals. However, very few among those can be used for trade management. One of the best indicators for identifying whether the existing trend would continue or reverse is the TSI or True Strength Index indicator.

What is a True Strength Index indicator?

TSI is actually a momentum oscillator. This technical indicator was developed by William Blau in 1991. TSI momentum oscillator is based on a double smoothing of price changes. This is because the calculation applies exponential moving averages as a smoothing factor.

The value of TSI oscillates between -100 and +100. Typically, when the TSI is positive, the bulls have the momentum edge and when the TSI is negative, the bears have the edge.

Interestingly, TSI tracks the underlying price quite well. This means that typically, the highs and lows in the TSI oscillator would match the peaks and troughs in price.

The True Strength Index indicator is generally plotted as a blue line. The signal line is plotted as a red or dark pink line. The figure below shows the TSI indicator.

How To Use TSI Indicator For Making Better Trades?

Following are the ways in which the TSI indicator can be used for making better trades.

#1 TSI Signal line Crossover

The signal line crossovers of TSI can be used for identifying buy and sell signals.

  • Whenever the TSI line crosses above the Signal line, a buy signal is generated
  • Whenever the TSI line below above the Signal line, a sell signal is generated

#2 TSI-Price Divergence

The bullish, bearish, and hidden divergences between TSI and price can be used to identify the reversal points and trend continuation points.

  • Bullish Divergence: Whenever the TSI indicator makes higher lows and the price makes lower lows, it implies bullish divergence.
  • Bearish Divergence: Whenever the TSI indicator makes lower highs and the price makes higher highs lows, it implies bearish divergence.
  • Hidden Bullish Divergence: Whenever the TSI indicator makes lower lows and price makes higher lows, it implies a hidden bullish divergence.
  • Hidden Bearish Divergence: Whenever the TSI indicator makes higher highs and price makes lower highs, it implies a hidden bearish divergence.

#3 Overbought and Oversold Levels

The TSI indicator can be used to identify overbought and oversold levels.

  • Whenever the TSI indicator is above +25, it is called as an overbought condition.
  • Whenever the TSI indicator is below -25, it is called as an oversold condition.

How Traders Use TSI Indicator in Trading

Here’s how traders use TSI indicator for trading

Bullish Signs

  • When the TSI indicator below -25 level and moves up, a bullish signal is generated
  • When the TSI line crosses above the Signal line, a bullish signal is generated
  • When TSI-Price shows Bullish Divergence
  • If there is a hidden Bullish Divergence between price and TSI, traders opt to hold onto their earlier bullish trade setup

Bearish Signs

  • When the TSI indicator is above +25 level and moves down, a bearish signal is generated.
  • When the TSI line crosses below the Signal line, a bearish signal is generated
  • When TSI-Price shows bearish divergence
  • If there is a hidden bearish divergence between price and TSI, traders opt to hold onto their earlier bearish trade setup

The figure below shows how TSI indicator can be used to determine general trend direction and for making relevant trades.

Happy Trading!

Tara