A technical indicator that reflects the strength of the trend as well as attempt to identify overbought and oversold conditions.
Overview
Developed by William Blau, the True Strength Index (TSI) is derived from the Relative Strength indicator. It is a momentum-based indicator that combines the leading characteristic of a differencing momentum calculation with the lagging characteristic of an averaging function to create an indicator that reflects price direction and and better timing of market turns.
The TSI on the EUR/USD Daily Chart on 3/18/2011
Source: VT Trader
Interpretation
The TSI can be used to determine general trend direction as well as overbought-oversold (OB/OS) conditions. There are 3 basic techniques for using the TSI to generate trading signals.
1) Crossovers: TSI /Signal line Crossover: A buy signal occurs when the TSI crosses above the Signal line and a sell signal occurs when the TSI crosses below the Signal line.
2) Divergence: Looking for divergences between the TSI and price can prove to be very effective in identifying potential reversal and/or trend continuation points in price movement. There are several types of divergences:
Classic Divergence (aka: Regular Divergence)
* Bullish Divergence = Lower lows in price and higher lows in the TSI
* Bearish Divergence = Higher highs in price and lower highs in the TSI
Hidden Divergence (aka: Reverse, Continuation, Trend Divergence)
* Bullish Divergence = Lower lows in TSI and higher lows in price
* Bearish Divergence = Higher highs in TSI and lower highs in price
3) Overbought/Oversold (OB/OS) Conditions: The TSI can be used to identify potential overbought and oversold conditions in price movements. An Overbought condition is generally described as the TSI being greater than or equal to the +25 level while an oversold condition is generally described as the TSI being less than or equal to the -25 level. Trades can be generated when the TSI crosses these levels. When the TSI crosses above -25 a buy signal is given. Alternatively, when the TSI crosses below +25 a sell signal is given.
Others Interpretations:
Support /Resistance and “Failure Swings”: Failure swings (a.k.a. support/resistance breakouts) occur when the TSI surpasses a previous high (peak) or falls below a recent low (trough).
TSI / Zero-level Crossover: When the TSI Histogram crosses above 0 a buy signal is given. Alternatively, when the TSI crosses below 0 a sell signal is given.
