Mastering the True Strength Index: A Comprehensive Guide for Traders

The True Strength Index (TSI) is a momentum oscillator that helps traders analyze trend strength and assess overbought and oversold conditions in the market. It helps identify potential changes in trend direction and highlights optimal entry and exit points.

TSI reflects price momentum shifts and can be used alongside other technical indicators to generate more accurate trade signals. Understanding TSI signal line crossovers helps traders make informed decisions and enhance their overall trading strategy.

The article covers the following subjects:

Major Takeaways

• TSI (True Strength Index) is a momentum oscillator that gauges trend strength and direction using two exponential moving averages.
• The main signals include signal line crossovers, centerline crossovers, and divergences with price movement.
• The best parameters are the standard 25, 13, 7 settings, though they can be adjusted to fit your personal trading strategy.
• Drawbacks: lagging behavior, false signals during sideways markets, and the need for confirmation using other technical indicators.
• Advantages: effective signal noise filtering, strong accuracy during clear market trends, and usefulness in confirming trend reversals.
• The TSI is most effective when combined with additional technical analysis tools such as the relative strength index, moving average convergence divergence, and key support and resistance levels.
• For short-term trading, TSI settings can be reduced to increase sensitivity to price changes.
• However, during sideways markets, the indicator becomes less effective and requires confirmation from other technical indicators to avoid false signals.

What Is the True Strength Index (TSI)?

The True Strength Index (TSI) is a momentum indicator used to assess the strength of a trend. He combines two smoothed price changes to eliminate market noise and provide clearer signals. TSI helps determine how strongly an asset’s price is moving in the current direction, whether it’s an uptrend or downtrend.

When the TSI is above the zero line, it indicates a bullish signal; conversely, a reading below the zero line suggests a bearish trend. Signal line crossovers near the zero line can serve as potential entry and exit points. The indicator also helps detect overbought and oversold conditions, which can be useful in identifying potential bullish reversals or the start of a downtrend.

With the help of TSI, traders can more accurately assess price momentum and anticipate potential trend direction changes. This makes the indicator a valuable tool for long-term forecasting and identifying strategic market entry points.

How to Calculate the True Strength Index

Let’s examine TSI calculation rules.

1. Calculating the Price Change.

For each period (e.g., daily), we calculate the difference between the current closing price and the previous closing price. This is known as the price change.

Here’s the formula:

where

• Ct is the current day’s closing price.
• Ct-1​ is the previous day’s closing price.

This price change is not directly used in the final TSI formula. However, it can be compared with the TSI line to evaluate whether the trend is forming correctly.

2. Calculating Smoothed Values

We apply exponential moving averages (EMA) to smooth price changes. 

Two values are calculated:

• Smoothed Price Change (SPC): the EMA of price changes over a defined period (e.g., 25 days).
• Smoothed Absolute Price Change (SAPC): the EMA of the absolute value of price changes over the same period.

3. TSI Formula Calculation

Once we have both smoothed values, we plug them into the final formula to calculate the True Strength Index:

This means that only the smoothed price change and the smoothed absolute price changes are used in the TSI calculation. These values result from smoothing price data to filter out short-term volatility.

Here’s an example. For simplicity, let’s assume the following values for the smoothed changes:

• Smoothed Price Change (SPC) = –2.1
• Smoothed Absolute Price Change (SAPC) = 5.5

Plugging these into the formula:

This value places the TSI in the negative territory, signaling a bearish trend.

How the TSI Works

The True Strength Index (TSI) is a momentum oscillator used to evaluate the strength and price momentum of a trend through a calculation based on double smoothed price change. It also helps identify overbought and oversold levels, making it easier to spot potential trend direction changes.

TSI is an adaptive tool, as it responds to shifts in market trends. The indicator adjusts automatically by smoothing price momentum shifts to reflect changes more clearly.

Interpreting the True Strength Index

The True Strength Index (TSI) helps assess the strength of a trend. It generates trade signals through TSI line crosses with the signal line, which may indicate the beginning of a bullish or bearish trend. When the TSI is in positive and negative territory — that is, above or below the zero line — it reflects bullish or bearish trends, respectively. A divergence between the TSI and the asset’s price may signal trend weakness. Extreme values of the indicator can point to overbought and oversold conditions, suggesting a potential trend direction change.

Signal Line Crossovers

When the TSI line crosses the signal line from below, it may indicate a potential bullish reversal, signaling an opportunity to open a long position. If the TSI line crosses the signal line from above, it produces a sell signal, suggesting a bearish trend. These signal line crossovers highlight rapid price momentum shifts and are especially effective in short-term trading strategies. 

However, it's important to remember that false signals can occur during sideways markets. That’s why it’s recommended to use TSI in combination with other technical indicators to confirm signals.

Centerline Crossovers

A crossover of the TSI with the zero line is significant for market analysis. When the TSI line crosses the centerline from above, it may indicate weakening bullish momentum or the end of an uptrend. A crossover from below, on the other hand, suggests a possible trend reversal to the upside. Such centerline crossovers help traders identify trend shifts early and adapt their trading strategy accordingly.

Divergences

Always pay attention to additional confirmation signals.

A divergence between the TSI and price movements is a critical sign for traders. When the price moves in one direction but the TSI shows the opposite, this may point to a weakening trend or an upcoming reversal. However, relying solely on the TSI is not always trustworthy, as divergences can lead to false signals. It’s crucial to use other technical indicators, such as the relative strength index, to confirm the signal.

On the chart below, we can see the price began moving upward, while the TSI continued to trend downward, showing slowing price momentum. At the same time, the relative strength index started rising — aligning with the price action. This confirmed that the bearish trend was losing strength and a price increase was likely. Thus, it’s crucial to combine the TSI with other technical analysis tools to make better-informed decisions.

Comparing TSI with Other Indicators

Let’s now compare the TSI with other technical instruments, like RSI, MACD and Bollinger Bands, and the Momentum Indicator.

1. RSI (Relative Strength Index). Both the True Strength Index (TSI) and the Relative Strength Index measure trend strength, but they differ in their approach. RSI focuses on overbought and oversold signals while TSI combines a momentum oscillator with noise filtering for clearer TSI signals. The TSI can be more useful for identifying long-term market trends, whereas RSI is better suited for short-term trade signals.
2. MACD (Moving Average Convergence Divergence). Like the TSI, MACD analyzes price change and helps identify trends. However, MACD uses two exponential moving averages, while TSI applies double smoothing to filter price data. As a result, the True Strength Index may be more sensitive to trend changes and capable of generating earlier trade signals.
3. Momentum Indicator. Both indicators track price change dynamics, but the True Strength Index (TSI) uses smoothing price methods to reduce the likelihood of false signals. Momentum provides sharper signals, which makes it useful in short-term trading, but also more sensitive to signal noise. In addition to measuring the speed of price change, the TSI also accounts for the overall trend, which makes it more reliable for analyzing broad price movements across the market.
4. Bollinger Bands. While the TSI evaluates trend strength, Bollinger Bands measure volatility and the potential support and resistance levels of price action. Bollinger Bands are useful for identifying entry points when the asset’s price touches the upper or lower boundary of the channel, but they do not indicate price direction. When combined with the True Strength Index, they help filter out false signals and confirm the validity of potential entries.

Pros & Cons of TSI

The True Strength Index (TSI) has its strengths and weaknesses, which are important to consider when using it in a trading strategy. It effectively helps identify trends and assess momentum in the market, but like any technical indicator, it doesn’t always generate accurate TSI signals, especially during sideways markets.

Pros	Cons
High accuracy in the long term – effectively identifies long-term market trends.	False signals during consolidation.
Incorporates trend strength and momentum – shows not only the direction but also the intensity of price movement.	Requires asset-specific calibration – needs to be fine-tuned for each trading instrument.
Easily integrates with other indicators – works well in combination with other technical analysis tools.	Slow response to reversals – may lag in signaling during trend shifts.
Signal accuracy during trending phases – especially effective in strong trending conditions.	Ineffective during low volatility – performs poorly in calm markets with limited price action.
Uses signal lines and the centerline – helps identify entry and exit points through signal line crossovers and centerline crossovers.

Hands-on use of TSI

To use the True Strength Index (TSI) effectively in trading, it’s crucial to understand its signals and consider the broader market context. Let’s examine two examples on the BTC/USD D1 chart, illustrating when it’s best to stay out of the market and when conditions favor a confident entry.

In the first screenshot, we see a period of sideways movement. During such phases, the asset’s price fluctuates within a narrow range without a clearly defined price trend. However, the TSI line continues to move downward, creating the impression of a persistent directional bias toward a bearish trend. This may mislead inexperienced traders into opening short positions in anticipation of further decline. Yet the absence of a strong directional move increases the risk of false signals. In such cases, the best trading strategy is to stay out of the market and wait for clear confirmation of a trend.

In the second screenshot, a favorable entry point is presented. Here, we observe a TSI line crossover with the signal line, while the RSI exits the oversold zone, indicating a potential bullish reversal. In this scenario, two technical indicators justify entering the market, which increases the reliability of the trade signal. After the TSI crosses, a trader may hold the long position as long as the signal remains confirmed. The trade can be closed after the next TSI line crossover in the opposite direction.

Limitations of the TSI

Signal Delay

The True Strength Index (TSI) is based on double smoothed price change using exponential moving averages, which makes it a lagging indicator. It reacts to price changes with a delay, which can lead to missed optimal entry points.

False Signals in Sideways Markets

When the market is flat, TSI may generate multiple false signals. For example, when the current price moves within a narrow range, the indicator lines may cross back and forth chaotically, creating the illusion of a trend change. In such cases, it is better to use TSI alongside other technical indicators to filter out noise and improve accuracy.

Inefficiency During Sharp Price Movements

During strong price movements, the TSI may fail to keep up with absolute price changes, leading to delayed trade signals. This is especially noticeable during major news releases when the price direction can shift abruptly.

How to Address TSI Limitations?

To minimize the shortcomings of the TSI, it is recommended to use it together with indicators like RSI or MACD (Average Convergence Divergence). This helps confirm signals and reduce market noise, especially during periods of volatile absolute price changes caused by external events. It’s also important to consider the overall market context and analyze historical price data for key support and resistance levels.

Conclusion

The True Strength Index (TSI) is a momentum indicator useful for analyzing price trends and price momentum. It helps traders identify optimal entry and exit points, confirm trend strength, and, through smoothing price fluctuations, spot bullish divergence or other key patterns in historical data. However, like any technical analysis tool, it has its drawbacks. TSI may lag behind price movements, produce false signals in consolidating markets, and be less effective during high volatility. 

To increase forecast accuracy, use the TSI together with the RSI, MACD, or support and resistance levels. When applied correctly, it becomes a powerful part of your overall investment strategy.

Feed from Litefinance.com

MoneyMaker FX EA Trading Robot