True Strength Index
The true strength index (TSI) is a technical momentum oscillator used to identify trends and reversals. The indicator may be useful for determining overbought and oversold conditions, indicating potential trend direction changes via centerline or signal line crossovers, and warning of trend weakness through divergence.
True Strength Index (TSI)
Definition
The True Strength Index (TSI) is a technical momentum oscillator used to identify market trends and reversals. By analyzing the momentum of price changes, it helps investors determine overbought and oversold conditions. TSI indicates possible trend direction changes through crossovers of the centerline or signal line and warns of trend weakness through divergences.
Origin
TSI was developed by William Blau in the early 1990s. Blau detailed this indicator in his book 'Momentum, Direction, and Divergence.' The TSI was designed to overcome the shortcomings of traditional momentum indicators, providing smoother and more reliable momentum signals.
Categories and Characteristics
TSI has the following key characteristics:
- Smoothness: TSI uses double exponential smoothing to reduce noise, making signals more reliable.
- Centerline Crossovers: When TSI crosses above the centerline (usually 0), it indicates a potential buy signal; conversely, when TSI crosses below the centerline, it indicates a potential sell signal.
- Signal Line Crossovers: TSI is often accompanied by a signal line (such as a moving average of TSI). Crossovers between TSI and the signal line can also serve as buy or sell signals.
- Divergences: When price movements diverge from TSI movements, it may signal a weakening or reversal of the current trend.
Specific Cases
Case 1: Suppose the TSI of a stock rises from -10 and crosses the 0 line. This is typically seen as a buy signal. An investor could buy the stock at this point and sell it when TSI falls below the 0 line again.
Case 2: In another example, suppose a stock's price continues to rise, but TSI starts to decline. This divergence may indicate an impending price reversal. An investor might consider selling the stock to avoid potential losses.
Common Questions
Q1: How does TSI differ from other momentum indicators?
A1: TSI uses double exponential smoothing to reduce noise, providing smoother signals. Compared to other momentum indicators like RSI or MACD, TSI's signals are more reliable.
Q2: How should TSI parameters be set?
A2: The common parameter settings for TSI are 25 and 13, meaning a 25-period momentum and a 13-period smoothing. Investors can adjust these parameters based on specific market conditions.
