Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to continue the series on Technical Analysis and why it can be such an important asset for new or experienced traders. In this series I am covering some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part XVIII the focus will be on the True Strength Indicator.
True Strength Indicator
The True Strength Indicator (TSI) is an indicator which is used to identify trends and reversal through the use of determining overbought and oversold positions. It is a technical momentum oscillator, and is shown using an oscillating graph which indicates potential trend direction changes via centreline or signal line crossovers. Divergences are a signal, especially when they are against the price, while the TSI is in itself and indicator which fluctuates between positive and negative territory. The level of overbought and oversold shown by the indicator will vary depending on the asset.
Calculating the True Strength Indicator
To calculate the True Strength Indicator it requires the knowledge of the EMA. To calculate the EMA first, a trader must:
Track the price changes and absolute price changes of an asset.
Calculate the price change for a 25 period EMA and absolute price change for a 25 period EMA.
Both of these EMA's need to have a smooth applied for a 13 period EMA.
Once both these figures have been reached, complete the formula below to calculate the TSI.
How to use the True Strength Indicator
The true strength is mainly used by traders to determine when an asset is in an oversold or overbought condition, spot divergences, identify trend direction, and note any changes in trend via the use of the centreline. It can also be used to highlight any short-term momentum in price with the signal line crossovers. While not always a guarantee, some assets can vary depending on the levels being overbought and oversold. Due to this some assets may reach the +30 or -30 levels before seeing a reversal in the trend, while others may only reach the +20 or -20 before a reversal happens. Therefore when using the TSI it is important to search back over previous periods of overbought or oversold and see the levels the indicator reached.
It is also important for traders to note that an overbought or oversold signal is not a signal to open a trade. It can linger in this period for a period of time, or traders will ensure other forms of TA are also indicating a reversal before opening their position. They may wait for the TSI to start reversing or they may wait for a crossover.
Signal Line Crossover
The TSI has a signal line which generally ranges in a 7 to 12 period EMA of the TSI line. A crossover happens when the TSI line crosses over the signal line. If the TSI line crosses above the signal line from below it can often be a sign of going for a long position. If the TSI crosses the signal line from above and goes below it, it can warrant the opening of a short position. These happen frequently, and they should always be used alongside other signals from the TSI, such as when the TSI is in overbought or oversold territory.
Centerline Crossover
This is another signal generated by the TSI, and it happens when the price momentum is positive when the indicator is above zero, or when the price momentum is negative when the indicator is below zero. Some traders are known to make use of the centreline as a directional basis, as in only going long when the indicator is above the centreline or short when it is below the centreline.
Breakouts and Divergence
The TSI can create levels for support and resistance for a trader to identify breakouts and price momentum changes. If the TSI indicator breaks below a trendline for example, it can indicate a continue of selling.
Divergence happens when the price of an asset is getting higher when the TSI is dropping. This is a bearish divergence and is a signal that a downside in price movement could be about to happen. If the price of an asset is dropping while the TSI is rising, it can be a bullish divergence and signal an upturn in price movement could be about to take place.
It is important to note that divergence is generally a poor signal when it comes to timing a trade, and should be used with other signals created by the TSI or other indicators.
Below is a couple of examples from Binance using the BTC/USDT 15 minute chart showing the above signals. It shows the candle chart along with notes I have added on the TSI chart. I have also added blue lines as basic info showing how the price action moved.
The first image shows a signal line crossover, where the lines cross indicating a reversal in the trend and a time to open a short trade. However, as shown in the image below the price actually rose significantly before taking a large drop. This would have been a classic case of the signal happening too soon and if a trade had been opened when the signal happened it likely would have been a lose, which would be especially annoying seeing as the trade would have been successful if opening after the price rose again.
The second image (below) shows a centreline crossover, which would have been a good trade. The TSI crossed the centreline while the price was rising. The price continued to rise overall and would have seen a nice return on a long trade. The TSI has also been in the overbought zone prior to this and was another strong indicator that it was a good time to place a long trade.
Limitations of the True Strength Indicator
The biggest drawback of the TSI indicator is that many of the signals it creates are false. The price action will not do with the signal indicated and any trade opened will likely result in a loss. An example would be during an uptrend when the centreline crosses below the centreline several times, but then the price proceeds higher even though the TSI indicates momentum has turned downwards.
The signal line crossovers can also happen so often that they may not provide a beneficial signal to a trader. They need to be filtered and used in conjunction with other indicators because of the rate they can happen. This is simply a scenario where the TSI changes directions but the price action does not change direction, meaning an opened trades based on this signal will likely result in a loss.
Finally, divergence can be unreliable as it can last for a long period of time and therefore provides little actual insight into when a reversal may actually happen. The reversal may not happen at all, but one which may take a long time could see the price continue to move it is original direction for awhile first, and that means any open trades could lose as they were opened too early.
Conclusion on using the True Strength Indicator for TA
As a trader, whether it be day trading or long term trading, using the True Strength Indicator can be very beneficial in spotting the overall direction of a tend, while also indicating any potential upcoming changes to the trend and overbought or oversold position. The TSI is a technical momentum oscillator, and is shown using an oscillating graph which indicates potential trend direction changes via centreline or signal line crossovers. It is important to understand the three types of signals associated with the TSI, but also how they can be limited in their signals. They are the signal line crossover, the centreline crossover, and the breakouts and divergence. These signals should be used together to get a greater strength to them, or they should be used alongside other Technical Analysis.
As stated whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading. It can be easy to get caught into false signals when they signals happen for a long period of time or many signals happen in a short period of time.
It is important to use the True Strength Indicator along with other TA to get the correct signals for understanding the potential reversals of a trend. Always zoom out, if trading on a 15 minute chart check the 1 hour or 4 hour or even 1 day chart to give you a better idea of the overall trend direction via the True Strength Indicator, along with checking the trend strength of the larger overall trend compared to short term ones.
You can find the previous parts to the series here:
Technical Analysis - Part I - Exponential Moving Average (EMA)
Technical Analysis - Part II - Relative Strength Index (RSI)
Technical Analysis - Part III - Bollinger Bands (BB)
Technical Analysis - Part IV - Moving Average Convergence Divergence (MACD)
Technical Analysis - Part V - On-Balance Volume (OBV)
Technical Analysis - Part VI - The Average Directional Index (ADX)
Technical Analysis - Part VII - The Aroon Indicator
Technical Analysis - Part VIII - The Accumulation/Distribution Indicator (A/D)
Technical Analysis - Part IX - The Supertrend Indicator
Technical Analysis Part X - Parabolic SAR Indicator
Technical Analysis Part XI - Support & Resistance Levels
Technical Analysis Part XII - Fibonacci Retracement Levels
Technical Analysis Part XIII - The Awesome Oscillator
Technical Analysis Part XIV - The Arnaud Legoux Moving Average
Technical Analysis Part XV - Ichimoku Cloud
Technical Analysis - Part XVI - Footprint Charts
Technical Analysis - Part XVII - Heikin Ashi Candlesticks
Also feel free to check out:
I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on the Klinger Oscillator. Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.
Have a great day.
Peace. CryptoGod-1.
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