Friday, October 7, 2011

True Strength Index (TSI) indicator and E-mini S&P 500 Futures (ES)

A couple of days ago I dabbled with the E-mini S&P 500 futures (ES) during my lunch hour at work and was fortunate to make $700+ in about an hour using my understanding of the True Strength Index (TSI) indicator. Yesterday produced a net (after commissions) gain of $410. Today my net gain was $568. A little of today's earnings was earned before I had to get ready for work in the early pre-market, and the majority was earned during my lunch hour today.

Click on the chart to ENLARGE

This is a chart I prepared to document my trading today. I tend to keep my eye on the 5 minute and 15 minute time frames so I can get a feel for the bigger picture, but all my trading decisions ultimately come down to what I see on the 1 minute chart and the TSI set at (7,4).

I have an understanding of what the TSI indicator is saying in the context of any time frame and have tried to share  my understanding with interested readers in detailed posts for the past 17 months. Additionally, I have created a couple of pages of specific information on how to use the TSI indicator - Overview and 6 Buy/Sell Techniques. These pages of information offer most of my best findings from 5 years of literally day and night research on the True Strength Index (TSI) indicator.

Of the four trades today, the first two were BUY signals generated from a positive divergence. 

As I am watching the one minute chart in real time I note the previous low of price and the TSI reading that corresponded with that low. I begin to get prepared to BUY when I see that price is going to make a new low but the TSI indicator is not going to also make a new low. 

I know this sounds silly, but I imagine the traders pushing the price lower not realizing they are walking into a trap in which I will likely win. These traders think they are accomplishing something really significant by pushing the price to a new low. When in reality I know they are pushing price to a new low with less momentum and that they are likely to have their heads handed to them.

My third trade was just the opposite of a positive divergence. It was based on a negative divergence.

A negative divergence occurs when price continues to make higher highs while the corresponding TSI readings make lower highs. In effect, price is rising on continually less and less momentum. Momentum to push the price higher is fading, as indicated by the TSI making lower and lower highs.

With just a minute or two left to spare before price again began to rise, I covered (bought back) the 2 contracts I had sold on this negative divergence setup.

With futures one can bet that price will rise by BUYING futures contracts and hope to sell these contracts later at a higher price. OR, one can SELL futures contracts on the notion that one will be able to buy them back at a lower price sometime in the near future.

The latter tact is what I was doing with this third trade - the negative divergence setup.

The fourth and final trade of the day was a bit of a nail biter for me. For one thing, I sold two contracts prematurely as the huge up candle that I sold into led to me believe that price would soon fall. I was wrong. For 7-8 minutes price went against me as it went higher and higher. 

Finally, the culmination of a nose-bleed (sky high) TSI reading followed by a huge spike in price that yielded a negative divergence SELL signal told me to hang in there for the imminent fall in price.

Price then cratered (as expected) and just before price resumed a new upleg I covered my short position and took my money off the table.

My students were on time today (1:30 cst) and the door flung open just as I concluded this fourth trade.

Now if you are wondering why I write all these details, I will now tell you.

I believe that the True Strength Index indicator works - at least most of the time. And I believe that if my readers wanted to take the time to learn how the TSI works it would help them a great deal.

The purpose of my website is to help other people. I sincerely hope this post and the hundreds of posts that preceded this one are helpful to you.



  1. i haven't spent the time to really learn the details, as i'm not a trader (yet?). but i enjoy reading your posts and appreciate your sharing an insight that really helps you and others.

    so thank you. i do look forward to going into more depth in reading (btw, do you discuss best software and ways to use it as well? i'm supposing so). have a great weekend!

  2. Apart from the divergence what is your other buy signal, just a single green candle?

  3. SP - the only software I use is freely available.

    JJJ - the single best TSI signal, in my opinion, is the trend line break, and not the divergence signal. As I am looking at the chart I posted above I realize I would have made considerably more money had I used that technique and not the divergence technique.

    I have not identified the trend line break signals in the chart above, but they are easy to see.

  4. Hi John, I just stumbled across the TSI in TC2000, for some reason this indicator sets up visually for me on the price chart. Wanting to know more about it, I did a search and found your work here on your blog. Thanks for shining the light.
    I notice you use the 4,7 parameter across all time frames. I'm sure you have tried others, or do you adjust as the market volatility changes?

  5. Anon - well, I've tried other parameters, yes. (25,13) is a good one for longer term swing trades. It gets you into and out of the trade late but the core timeframe is very accurate.

    I consider it infinitely more important to understand what the TSI is telling you, than the particular parameter setting.

    The difference between the (5,3) and (7,4) and (8,3) parameters, for example, is kinda like splitting hairs. There is no advantage to one or the other if you do not understand how to interpret the indicator in the first place.

    If interested, I hope you find time to explore a number of my posts as they will help you get a feel for the techniques. And of course, write me whenever you have a question.

  6. Hi John! How are you doing?

    Today I've been researching a bit and using all the things I've learnt in your blog.

    I took a look at RVM and I think it looks interesting. In 12th and 26th September the TSI made same lows but the price was decreasing and after that the TSI made higher lows while the price has been decreasing also. Could you kindly take a look and tell us your opinion? I am still a novice but I am excited about everything now :p

  7. Hi Toni - I'm doing OK, thanks. Now that the 75 days from hell of over 100 degree temperature is over, I feel really good, now that I think about it.

    Revett Minerals - I know this one from a long while back. I remember looking at it a few years ago when it was selling at .2X Book Value and something silly like 30 cents per share and wondering why in the world the thing was so poorly priced.

    You know how that goes - nobody likes the stock so I decided to not like it too! And now I see it traded as high as $5.34 in July. Incredible.

    I do see exactly what you are looking at and your instincts are very good. It seemed that last Friday should/could have been the big 'break out' but with the market under pressure all day RVM was denied its day of glory.

    If I was trying to trade this I would keep a sharp eye on the 4 hour chart. If by chance you were to see a price of $3.10 that would be a positive divergence and probably a near certain winner.

    Other than for that, there is a very well defined TSI down trend line defined back to September 29. Until the 4 hour TSI can crack up through that line you are better off being patient, in my opinion.

    Good luck and if you make a killing - I want to hear about it, OK?