Sunday, October 9, 2011

True Strength Index (TSI) Time Frame Study

This post will examine how the True Strength Index (TSI) indicator works in various time frames. I will use the Standard & Poors 500 (SP-500) and my preferred TSI setting of (7,4) as my constants and show current charts of the 1 minute, 5 minute, 60 minute, 4 hour, daily and weekly time frames.

The buy and sell signals identified on each chart include the trend line break, negative/positive divergence, ZERO crossover and nose bleed techniques. The support/resistance and moving average crossover techniques are not used (but can be explored here).

In case you are wondering how the various time frames change the interpretation or effectiveness of the TSI indicator, I'll cut to the chase - they don't. And my preferred TSI magnification of (7,4) works the same as the TSI (13,7) or TSI (25,13) settings, just faster!

Click on any chart to ENLARGE

Let's begin with this 1 minute chart of the Standard & Poors 500 (SP-500). As you look carefully at each chart in this study you will see the same techniques executed over and over again. What I would like to bring to your attention are the exceptional times when one, in real-time trading, may have second thoughts about what to do.

The time period from 3:15 p - 3:30 p was one of those times where an understanding of what was going on would have come in handy. The TSI reached a reading in excess of +0.75 (Nose Bleed) and one may have reasonably chosen to go short. However, price then continued to rise. 10 minutes later a negative divergence sell signal appeared and price dutifully began to ease. But then price continued even higher.

At this point a trader could panic and sell the short position at a loss - OUCH! But a little patience would have been better. A second negative divergence was in place just after 3:30 p. This would have encouraged me to hold on. Then a couple minutes later a trend line break SELL signal occurred. At that point I may have been sweating a bit but all the evidence was in my favor and I would hopefully have held on.

Then the TSI fell right through ZERO as price began to collapse. Finally. This kind of stuff happens sometimes and if you know the rules and trust them, things usually work out OK.

So let's have a look at the 5 minute chart now. Here again, most of the TSI trend line break signals worked out great. But there were a couple of patience testing scenarios, as well. These two areas are identified with a hot pink rectangle uniting price above and the TSI below.

As in the 1 minute chart, the trend line break signal was followed by price not moving in the anticipated direction. This was followed by a divergence signal confirming the trend line break signal and ultimately a second trend line break signal. Both trades were impressively profitable but one had to, again, have confidence and patience to win the prize.

I am sure you are wondering why the trend line break signal sometimes 'fails' - leaving one to suffer panic and potentially sell at a loss. The answer, usually, is that the trend line break occurs when the TSI reading is far away from the ZERO crossover. Subsequent divergences then occur as the indicator works its way closer to ZERO. These divergences tell me that I am in the trade correctly but patience is required.

Here is the 60 minute chart. This is a really easy chart to understand - very easy to trade successfully. You will appreciate this when we get to the daily chart, trust me.

The Nose Bleed signal, btw, occurs when the TSI reaches something around +0.75 or -0.75. I don't think of this signal as some absolute number though. Rather, I like to look back as far as possible on any particular time frame and see what the extreme readings have been in the past. Sometimes they are 0.85, sometimes they are 0.68 - I think it just depends on the relatively recent volatility of that particular time frame.

Well, on to the 4 hour chart. I happen to really like the 4 hour chart, and have found it invaluable in looking at the movement of gold's price.

Anyway, this chart, like the 1 hour, is very clear and has been very easy to trade. I really do not see any sucker setups on this chart to bring to your attention.

Now this daily chart is ...... something of a nightmare. Which is not to say that daily charts are a nightmare using the TSI. It is to say that the SP-500 daily chart for the past couple of months has been a nightmare.

And this is the point at which I will confess this study retaught me something. And that is that sometimes it is much better to trade off a particular time frame than another.

The SP-500 is the same ticker symbol throughout this study, but the ease of trading it on the 4 hour versus the daily chart is remarkable. And I am sure there are times it is just exactly the other way around. The point is to get in tune with a time frame that is making good sense and stick with it.

Finally, the weekly chart. I look at the weekly chart to help me get a feel for the power of a longer trend. Something I am keenly aware of is the proximity of the TSI to the ZERO crossover. That is because the further the TSI is from ZERO the more time will likely be required for price to change direction.

I also know that when the TSI is rising above ZERO, price is always rising. Opposite when the TSI is falling below ZERO.  So, a falling weekly TSI below ZERO suggests a sustained bearish environment.

Our current TSI reading shows that the positive divergence that began the week was bullishly resolved by the end of the week.

And this is the take away I hope you get from reading this article: the TSI does a wonderful job of telling a trader when things are out of balance and thereby indicates which way price will need to move to resolve the imbalance. Sometimes the change in price direction is nearly instaneous. Sometimes, it requires a little patience. But if you understand what the TSI is saying and have confidence in its accuracy, you should be able to do very very well.



  1. I wondered if you might do a live video at some point with some trades. The problem with divergences and trend line breaks is that they are always easy in hindsight yet picking up in the signals and acting on them is key.

  2. jj - I don't have any plans to do a live video, but I guess other people who are trying to make money with their website do so.

    I'm not exactly sure what your point is about the problem of the signals being easy to see in hindsight.

    I see the signals as they occur just as I see them in hindsight. In fact, I normally have a couple of trend lines drawn on my chart as I trade so I can anticipate price movement before it happens.

    I also usually have an order to sell or buy at a price point that itself represents the divergence price, should it be reached. A lot of my moves are actually a step or two ahead of the current action, not behind it.

  3. Thanks John. Excellent article. On Friday you were trading the ES contract. Is there any advantage to trading the ES vs the SPY ETF? I've tried without luck to locate the article in which you explain the TripleTSIStripped indicator. Do you happen to remember which article has that info? Thanks again. BB

  4. John,
    On the TSI, can you clarify the 7,4? I thought you put 4,7.
    On Freestockcharts, do you put long period 4 short period 7 or the other way around?
    Thanks, great study.

  5. BB - lol, someone else emailed me the same question. This is a custom indicator I made using thinkScript. Long story short, I made a rather complicated indicator with numerous experiments built into it. None of the experiments proved to be worth a damn.

    But I did figure a way to display the TSI in one color when it was rising and another color when it was falling. So I stripped out most of the code I wrote, renamed the file as you see it, and that's it.

    The indicator is nothing more than the standard TSI with changing colors. I am thinking about stripping some more junk out of that code and posting it on my website so others, such as yourself, can enjoy using it.

    Thanks for the question.

    MrMiyagi - and thank you for asking your question, which has indeed come up a few times in the past 17 months.

    I got used to naming the long period first, short period second years ago when I first read the book of Wm. Blau (Momentum, Direction, and Divergence: Applying the Latest Momentum Indicators for Technical Analysis, 1995)who invented the TSI. This is the convention he used, and he was fond of using (25,13), btw - which I cut in half to (13,7) and in half again to (7,4).

    Truth be told, there is no difference between (7,4) and (4,7). Try it yourself and you will see. Hummmm.... probably another excellent short post topic where I would show price, and in the indicator panels below the TSI (7,4) and TSI (4,7). Thanks for the idea.

  6. BB - Sorry, I see I forgot to answer your other question. I don't think there is much difference in trading the ES futures contract vs. the SPY ETF as far as the TSI part of it goes.

    The issue of leverage and availability are the main two things different I can think of. SPY trades at 1:1 leverage (no leverage) with the S&P 500. ES trades at 50:1 leverage (lots of leverage).

    Also, SPY is available to trade when the NYSE is active and for a short while before and after that window of time. ES futures contract trade 24 hours a day, except over the weekend.

    So I can wake up at 2:30 am and trade the ES futures if I want to, but not SPY. And, when I goof up, the pain is 50 times greater trading ES than SPY. You can lose a lot of money in a hurry trading futures contracts.

  7. Hi John, thanks for the continued education. I though this might be of interest to the people on this blog that the tsi indicator is also available on thinkorswim's mobile app so even if you are not near a computer or can't remote into one you can still use the indicator on your phone.

  8. What is your normal stop loss when trading the 1min charts?

  9. TSI(4,7)==TSI(7,4) because of the symmetric nature of double EMAs in the TSI. For mathematicians: the triangular matrix.

    John, thanks for all your great contributions!

  10. John,

    I noticed you mentioned about GOLD & TSI. What do you also think the best period is for FOREX EUR/USD?

    Higher time frames = less volatility = better picture?

    Thanks John for your help