How to Use True Strength Indicator: A Comprehensive Guide
The True Strength Indicator (TSI) is a momentum oscillator that helps traders identify the strength of a security’s price movement. It is designed to filter out noise and provide a clear signal for buying or selling. In this article, we will discuss how to use the True Strength Indicator effectively to enhance your trading strategies.
Understanding the True Strength Indicator
The True Strength Indicator is calculated by comparing the average gain and loss over a specified period. It is a 13-period indicator, which means it takes into account the price movements over the past 13 days. The formula for TSI is as follows:
TSI = 100 – (100 / (1 + RS))
Where RS is the Raw Strength, which is calculated by taking the difference between the average gain and the average loss over the specified period, and dividing it by the average absolute value of the gain and loss.
Interpreting the True Strength Indicator
The TSI ranges from -100 to +100. A reading above +50 indicates that the security is in a strong uptrend, while a reading below -50 suggests a strong downtrend. Traders often look for crossovers of the TSI line to generate buy or sell signals.
Here are some key points to consider when interpreting the True Strength Indicator:
– A TSI line crossing above +50 can be a buy signal, indicating that the security is gaining momentum.
– A TSI line crossing below -50 can be a sell signal, suggesting that the security is losing momentum.
– A TSI line crossing back above +50 after a downward trend can be a sign of a potential reversal.
– A TSI line crossing back below -50 after an upward trend can indicate a potential reversal.
Using the True Strength Indicator in Trading Strategies
To use the True Strength Indicator effectively, you can incorporate it into various trading strategies. Here are a few examples:
1. Trend Following: Use the TSI to identify strong trends and enter trades in the direction of the trend. For example, buy when the TSI crosses above +50 and sell when it crosses below -50.
2. Divergence Trading: Look for instances where the TSI is diverging from the price action. For instance, if the TSI is making new highs while the price is making new lows, it may indicate a bearish divergence, suggesting a potential reversal.
3. Range Trading: Use the TSI to identify when a security is moving within a certain range. Enter trades when the TSI crosses above +50 to buy and below -50 to sell.
Conclusion
The True Strength Indicator is a powerful tool for traders looking to identify the strength of a security’s price movement. By understanding how to interpret the TSI and incorporating it into your trading strategies, you can improve your chances of making profitable trades. Remember to backtest your strategies and adjust them as needed to ensure they align with your trading goals.
