Overview of The True Strength Index
by The TSI Trader
The True Strength Index (TSI) is an extremely responsive momentum indicator with very little lag time in its representation of price movement momentum. The indicator is designed so that when it is rising above zero, price is also rising. Also, when the indicator is falling below zero, price is also falling.
Perhaps this sounds too good to be true, but it is true!
Darn, just when we thought we found the Holy Grail to robbing the stock market for riches. There is always a catch, isn’t there?
Fortunately, there is a fairly decent workaround to answer the questions I raise. And that is the use of adding a moving average to the TSI indicator. One can use a crossover of the indicator with respect to the added moving average in cases where price direction is not a certainty.
So, for example, if the indicator is reading below zero, the only certainty is that price will go south if the indicator continues to fall. But if the indicator is rising below zero and has crossed up through its accompanying moving average that can be taken as a buy signal.
This chart will demonstrate what I have discussed. This is a daily chart of GDX. The TSI indicator is displayed in the panel below price and its color is purple. The blue line is the moving average of the TSI indicator. Here I have the TSI indicator set to 13,13. The moving average of the TSI indicator is set to 3.
I have drawn vertical white lines where the indicator begins to cross up through its moving average line and white lines where the indicator fails to rise further above the ZERO LINE. This chart is 6 weeks of daily price movement and you can see that the indicator accurately gave us 3 nice buy and sell signals.
Here is another look using the same TSI and moving average settings. This time the chart is of GLD in a 60 minute view, rather than a daily chart.
And we see that in the past 6 or 7 daily trading sessions the TSI gave us a couple of nice buy and sell signals (vertical white lines). These trades were kinda no-brainers because the rising TSI indicator was above ZERO the entire time – therefore we KNEW that price would be rising with it.
We have also learned the technique of using a moving average on the TSI to generate buy and sell signals. Notice how the purple TSI indicator crossed below the blue moving average (and stayed there) for almost 2 full weeks before the crash!