Besides being a momentum oscillator, the True Strength Index (TSI) has its basis on double smooth price changes. And as such, it’s coupled with two exponential moving averages, with the double smoothing functionality assisting a trader in filtering out noise. Subsequently, TSI tracks price action ebbs and flows with a significantly steady line.
Similar to most momentum oscillators, it enables traders to derive trend insights—not only from overbought/oversold analysis, but also from centreline crossovers, bullish divergences, and signal line crossovers.
TSI assist in the analysis of an instrument’s price momentum (the rate of price change). It conceptualizes the speed at which price changes to always forerun and fundamentally guide price changes. Hence, the more significant the speed, the faster the oscillator’s price changes. These subsequent fast changes also depict a stronger price trend.True Strength Index Indicator Series: How Does It Work? Click To Tweet
How TSI’s Work
True Strength Index automatically determines its values based on differences in percentage amount between the current period’s double-smoothed price and that of the preceding sessions. Conversely, this proffers chartist specified values for particular trading periods. On the chart, the TSI line moves up or down, above or beneath the zero line.
In case the oscillator’s line goes up, then, an uptrend prevails. Equally, when the oscillator’s line plummets, a downtrend prevails. For that reason, the higher the variance between the TSI line from the zero line, the relatively stronger is the price momentum.
Extreme values serve to alert a trader of either oversold/overbought conditions or possible trend reversals. On the other hand, incidents of the oscillator line tending to closely hang around the zero line for a substantial amount of time indicates a sideways market presence.
What’s more, the TSI oscillator frequently fluctuates from positive to negative territories. And as with many momentum indicators, the centreline denotes the overall bias. All things considered, the bulls have an edge when the TSI is positive, while the bears enjoy an upturn when it’s negative.
In a Nutshell
The double smoothed price change characteristic makes TSI a unique indicator. More so, with the price changes expressing the momentum in its purest form. Also, the double smoothing brought into play by the two exponential moving averages decreases noise—hence increasing the effectiveness of the instrument in tracking prices.
Ultimately, the oscillator offers traders the ability to draw trend lines alongside support lines and resistance lines within the TSI. Thus, allowing traders to generate signals based on breakouts and breakdowns.