The True Strength Index or TSI was developed by William Blau. The True Strength Index (TSI) is a momentum oscillator based on a double smoothing of price changes.
Although it takes several steps to calculate, the indicator is actually quite straightforward and simple.
By smoothing price changes, TSI captures the ebbs and flows of price action with a more solid line that filters out the noise.
As is the case with most momentum oscillators, traders can derive signals from overbought/oversold readings, centerline crossovers, bullish/bearish divergences and signal line crossovers.
The first part, which is the double smoothed price change, determines the positive or negative tone for TSI. The indicator is negative when the double smoothed price change is negative and positive when it is positive. The double smoothed absolute price change brings normality to the indicator and limits the range of the consequent oscillator.
Alternatively, the TSI measures the double smoothed price change relative to the double smoothed absolute price change. A flurry of large positive price changes results in relatively high positive readings because this signals strong upside momentum. A line of large negative price changes will result in negative readings.
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The TSI is calculated using the following formula:
Double Smoothed Price Change (PC)
PC = Current Price minus Prior Price
First Smoothing = 25-period EMA of PC
Second Smoothing = 13-period EMA of 25-period EMA of PC
Double Smoothed Absolute Price Change (PC)
Absolute PC (APC) = Absolute Value of Current Price minus Prior Price
First Smoothing = 25-period EMA of APC
Second Smoothing = 13-period EMA of 25-period EMA of APC
TSI = 100 x (Double Smoothed PC / Double Smoothed Absolute PC)
The True Strength Index (TSI) is an oscillator that fluctuates in positive and negative territory. Just like many other momentum oscillators, the centerline determines the overall trend. When TSI is positive it is considered bullish and when it's negative the trend is seen as bearish. A signal line can be applied to identify upturns and downturns, similar to the MACD. The frequency of signal line crossovers however, require further filtering with other techniques. Traders can also look for positive and negative divergences to anticipate trend reversals. Always, keep in mind that divergences can be misleading in a stock displaying a strong trend.
TSI gets it's uniqueness because due to it's ability to track the underlying price. TSI is an excellent oscillator with the ability to capture a sustained move in one direction or the other. The peaks and valleys in the oscillator often match the peaks and valleys in price. TSI will allow you to draw trend lines and mark support/resistance levels. Line breaks can be used to determine buying and selling signals.
As with all other indicators, don't just rely on the defaults, adjust your indicators to suit the stock you are looking at and your trading style.
Typically shorter look backs (lower #'s on your indicators) give you quicker signals which is good for aggressive traders, while longer look backs (higher #'s on your indicators) give slower but more reliable signals for traders who are more conservative.
As we always say: "Don't use your hard earned cash to find out what kind of trader you are, use a virtual account for that."
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