True Strength index(TSI): How to analyze the direction of the financial market using True strength index indicator

True Strength index(TSI): How to analyze the direction of the financial market using True strength index indicator


True strength index indicator is a kind of crossover momentum oscillator indicator.
Being a momentum crossover oscillator indicator, True strength index  indicator was created by William Blau with the main objective of helping traders to know whether the market is in an overbought or oversold condition at crossover points.
Since True strength index  indicator is a crossover based oscillator indicator, it therefore has two crossover lines,the red and the blue line.The red line indicates the signal line  while the blue line indicates the true strength indicator.
Just like other oscillator indicators, True strength index  indicator has oscillation at point  0 ranging between -100 to 100.
According to William Blau, True strength index indicator values are found using the following formula;


True strength index indicator(TSI)=( DOUBLE SMOOTH PRICE CHANGE/DOUBLE SMOOTH ABSOLUTE PRICE CHANGE)*100
On the chart you will mostly discover that the value is in decimal point, that is, not yet multiplied by 100.


Therefore, Since True strength index indicator is an oscillator and is based on crossover of the TRI above or below the signal line to indicate oversold and overbought in the market ,it therefore follows that when the True Strength index crosses above the signal line at below -25,that will be an indication of an oversold market thus the trader should close any sell position and open a buy position since the market will start moving upwards while when the True strength index crosses below the signal line at above 25 that will be an indication of an overbought market thus the trader should close any buy position and open a sell position since the market will start moving downwards.This is indicated as from the candle sticks chart below;



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From the candle sticks chart above,there are 4 points,A,B,C and D. Point A represents a point in which the True strength index indicator has rises above the signal line while point B represents the point at which the True strength index has fallen below the signal line.Point C which is blue line represents the True strength index(TSI)  while point D which is red in color represents the signal line.
At point A,the True strength index has risen above the signal line at below -25 thus an indication of an oversold market thus signaling the trader to close any sell position at that point and open a buy position since the market is starting an uptrend at that point .On the other hand,at point B,the True strength index has fallen below the signal line at above 25 thus an indication of an overbought market at that point thus signaling the trader to close any buy position at that point and open a sell position since the market is starting a downtrend.

 


Recommendation:If you are a day trader,just use 1 min,5 min,15 min and 30 min time frame while if you are a swing trader just use 1 hour and above time frame if you want true strength index indicator to work well for you.

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quintomudigo
quintomudigo

Trader, Blockchain Technologist and Contentpreneur. Also founder and CEO @ Teacher Forex School.


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