If you’ve ever felt lost in a sea of technical indicators, with your charts looking like a tangled mess of lines, we understand. It’s a common challenge for traders, which is why we rely on the True Strength Index TSI. Unlike many oscillators that can be choppy and misleading, the TSI is specifically designed to filter out market noise. Its unique “double smoothed” approach provides a much clearer picture of a trend’s real strength and direction.
In this comprehensive guide from the team at piprider.com, we won’t just present textbook definitions. We will share our collective splaybook on how to use this powerful tool for practical trading, covering everything from identifying trends and managing risk to spotting high-probability reversal opportunities.
Key Takeaways
- The True Strength Index (TSI) is a smoothed oscillator that reveals a trend’s true momentum.
- Its unique formula uses a double smoothed calculation to effectively filter out erratic price noise.
- Read the TSI chart by identifying crossovers, divergences, and key overbought/oversold levels.
- Use this indicator to confirm trends, trade powerful reversals, and validate breakouts.
- The TSI often provides clearer and less frequent trading signals compared to the RSI or MACD.
1. What Is the True Strength Index TSI?
1.1. Definition
True Strength Index TSI is a technical momentum oscillator that gauges the strength and direction of a market trend (StockCharts, n.d.). Its primary objective is to provide a clear, smoothed representation of price momentum by measuring the velocity of price changes. What makes the indicator unique in technical analysis is its method of double smoothing these price changes, which helps to filter out insignificant market noise.
In the 1990s, William Blau engineered the TSI to blend the responsiveness of a momentum indicator with the stability of moving averages. This creates a versatile tool that we find highly effective across various financial markets (Investopedia, 2005).
Here is how we typically apply the TSI:
- Stocks: We apply it to confirm the strength of a stock price move following major news or earnings.
- Forex: It filters noise during quiet periods and highlights true momentum when major market sessions overlap.
- Crypto: Its smoothing feature is essential for separating sustainable trends from brief, volatile spikes.
1.2. Components
The TSI is constructed from three primary components that work together to produce the final indicator.
- Price Momentum Line (PML): This measures raw market momentum, calculated as the difference between the current and previous closing prices.
- Volatility Smoothing: This core mechanism applies a double Exponential Moving Average to the PML. This smoothing technique effectively smooths the data to filter out market noise.
- Signal Line: This is an EMA of the final, smoothed TSI line. We use its crossovers to identify potential trading signals.
2. How to Calculate the True Strength Index TSI?
While modern trading platforms calculate the TSI for us automatically, understanding the calculation behind the formula helps us appreciate why it is so effective at filtering out market noise. The calculation involves a multi-step process designed to smooth raw price data.
The core formula is as follows:
TSI = 100 × (Double Smoothed PC / Double Smoothed Absolute PC)
Let’s break down each component:
- Price Change (PC): As the indicator’s most basic input, this value represents the difference between the current close and that of the previous period.
PC = Current Close – Prior Close
- Absolute PC: This represents the non-negative value of the Price Change for the period.
- Smoothing Periods (EMAs): The crucial step is the double-smoothing process, which uses two sequential Exponential Moving Averages (EMAs). The process begins by applying a long-period EMA (typically 25 periods) to both the PC and the absolute price change. The result is then smoothed a second time with a short-period EMA (typically 13 periods).
This two-step smoothing gives the TSI its characteristic smoothness.
A Simple Example with a TSI Stock Price
For instance, if a stock closes at $152 today versus $150 yesterday, its Price Change (PC) is +$2. The absolute value is also $2. The TSI then processes these daily values over time, applying 25-period and 13-period EMAs. This process creates the final, smooth TSI line seen on a chart.
Read more:
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3. Interpreting the True Strength Index TSI Values
The correct interpretation of the True Strength Index indicator is straightforward. We focus on three key signals: extreme levels, line crossovers, and price divergence, which often foreshadow significant market turns.
3.1. Overbought and Oversold Levels (+25 / -25)
These levels act as warning zones when a trend might be overextended.
- Above +25: Suggests strong buying pressure that might soon run out of steam, potentially leading to a price drop.
- Below -25: Suggests strong selling pressure that could be nearing exhaustion, potentially leading to a price bounce.
Our advice: Use these levels to manage existing trades (e.g., tighten stop-losses), not as standalone signals to open new ones. An asset can remain in this extreme zone for a long time.
3.2. Centerline & Signal Line Crossovers
Crossovers signal a potential shift in market momentum.
- Centerline Cross: When the TSI crosses above zero, momentum turns bullish. When it crosses below zero, momentum turns bearish. This is a primary trend direction signal.
- Signal Line Cross: A faster, earlier signal occurs when the TSI line crosses its companion EMA. This can be used for more aggressive trade entries.
3.3. Divergence Between TSI And Price
The True Strength Index TSI and Price Divergence is a powerful reversal signal that occurs when the indicator and the price move in opposite directions. Spotting this disagreement is a key skill for anticipating a potential price reversal.
- Negative Divergence: The price makes a higher high, but the TSI makes a lower high. This warns that buying momentum is weakening.
- Positive Divergence: The price makes a lower low, but the TSI makes a higher low. This warns that selling momentum is fading.
4. Trading Strategies Using The True Strength Index
Knowing how to read the True Strength Index TSI is one thing; applying it to a live trade is another. We use the TSI in three primary strategies, each suited for different market conditions.
4.1. Trend Confirmation Strategy
This is our preferred method for lower-risk entries, as it focuses on joining an existing trend rather than predicting a new one. We use the chart itself to identify a clear market direction and wait for a temporary pullback. The trade entry is timed for when the True Strength Index TSI confirms that momentum is re-aligning with the dominant trend, such as the TSI line crossing back above its companion EMA during a dip in an uptrend.
4.2. Reversal Trading Strategy
This advanced strategy uses divergence to anticipate potential trend reversals. When we spot a positive divergence, where the price makes lower lows but the TSI forms higher lows, we see it as a sign that selling pressure is weakening. A trade is only considered after the chart itself validates this signal, for instance, through a strong reversal candle pattern or a break of key trend lines.
4.3. Breakout Entry
The TSI is an excellent tool for filtering out false breakouts, which are common traps. When a price breaks key support or resistance levels, we immediately look to the TSI for confirmation. A valid breakout should be supported by strong, corresponding momentum in the indicator. If the price breaks out but the TSI is flat, weak, or moving in the opposite direction, we treat it as a high-risk “false breakout” and will typically avoid the trade.
5. Practical Applications Of The True Strength Index TSI
Beyond specific strategies, the TSI has three core functions that make it a valuable part of a daily trading process:
- Trend Confirmation: A primary application is to confirm the strength of a trend. A healthy uptrend should be accompanied by rising TSI values. A falling TSI during an uptrend can warn that the move is losing momentum.
- Trade Entry and Exit Signals: The indicator generates clear signals for timing trades. A trader might enter a long position on a bullish centerline crossover or exit a position when a bearish divergence warns of a potential reversal.
- Risk Management: The TSI also serves as a proactive risk management tool. By identifying weakening momentum or potential reversals, traders can adjust stop-loss orders or reduce position sizes accordingly to protect capital.
6. Example Scanners And Trade Setups With TSI
Automating the search for high-quality setups is a key part of efficient trading. The TSI is well-suited for use in market scanners and automated alerts.
6.1. Scanning for TSI Signal Line Crosses
Most trading platforms allow you to build custom scans to find assets that meet specific criteria. A simple yet effective scan is to look for a TSI crossover, which can indicate the start of a new momentum move.
- Bullish Scan: The condition would be “The TSI Line crosses above its companion EMA.” This helps find stocks or forex pairs where momentum is just starting to turn positive.
- Bearish Scan: The condition would be “The TSI Line crosses below its companion EMA.” This is useful for identifying assets where momentum is shifting to the downside.
6.2. Setting Up Alerts on TradingView & TrendSpider
Manually watching charts all day is not practical. Setting up alerts is far more efficient.
- On TradingView: Select your asset, open the “Alerts” panel, and set the “Condition” to the TSI indicator. You can then create an alert for when the TSI crosses its companion EMA, the Zero Line, or even a specific value like +25.
- On TrendSpider: This platform excels at multi-factor alerts. A trader could create a more robust alert that only triggers if the TSI crosses its companion EMA and the price is above a key moving average at the same time.
6.3. Case Study: A High-Probability Setup (TSI + Volume + EMA Filter)
Confluence is when multiple indicators provide the same signal, increasing the probability of a successful trade. Here is a classic setup that combines the True Strength Index TSI with other tools.
Let’s imagine a stock is in a long-term uptrend, confirmed by its price trading above the 50-period EMA. A trader spots a positive divergence on the TSI during a price pullback, suggesting the downtrend is losing steam.
The entry is not taken on the divergence alone. Instead, the trader waits for the price to break above a short-term resistance level. The final confirmation is that this breakout occurs on higher-than-average volume, and at the same time, the TSI crosses above its signal line. This combination of a long-term trend filter (EMA), momentum signal (TSI), and volume confirmation creates a robust, high-probability trade setup.
7. Comparing TSI with Other Momentum Oscillators
No single indicator is perfect for all conditions, and it’s important to understand the nuances of different oscillator signals. Choosing the right tool depends on the market environment and your trading style. The table below provides a concise comparison of the most popular momentum oscillators.
| Indicator | Advantages (Pros) | Disadvantages (Cons) | Best Use Case |
| True Strength Index (TSI) | Very smooth; filters out market noise Fewer incorrect signals in trending markets | Slower to react to sharp, sudden price changes | Identifying momentum in trending markets |
| Relative Strength Index (RSI) | Simple for spotting divergence Effective for overbought/oversold levels | Can be choppy and give false signals Stays extreme in strong trends | Gauging overbought/oversold in moderately trending or range-bound markets |
| MACD | Defines the primary trend’s direction Histogram visualizes momentum shifts | It is a lagging indicator by design Prone to whipsaws in sideways markets | Confirming the strength and direction of a long-term trend |
| Stochastic Oscillator | Very fast and responsive to price Excellent for signals in ranges | Extremely “noisy” and erratic in trends Causes many misleading entries | Trading reversals in range-bound, sideways markets |
8. Frequently asked questions about the True Strength Index TSI
9. Summary
Mastering the True Strength Index TSI is not about memorizing a complex calculation but about understanding its role as a powerful momentum filter. By interpreting its centerline crossovers, divergence signals, and overbought/oversold levels, traders can gain a significant edge in identifying trend strength and potential reversals.
The TSI is a fantastic tool, but it’s just one piece of a complete trading system. To build a robust strategy, it’s essential to understand how other tools work. We encourage you to continue your learning journey by exploring our comprehensive guides in the Best Technical Indicators category on Piprider.
