True Strength Index (TSI)

True Strength Index (TSI)

What is the TSI?

The True Strength Index (TSI) is a momentum oscillator used by technical analysts to gauge the strength and direction of price movement. It helps identify trend direction, potential reversals, overbought/oversold conditions, and divergence between price and momentum.

Key characteristics

• Oscillator that fluctuates above and below zero (positive = bullish momentum, negative = bearish momentum).
• Common signals: signal-line crossovers, centerline (zero) crossovers, divergence, and breakouts of trendlines drawn on the indicator.
• Overbought/oversold thresholds vary by asset; some traders watch ±20 to ±30 as possible extremes.
• Best used with other analysis (price action, volume, or additional indicators).

Formula and calculation

TSI smooths price changes using two EMAs (double smoothing) of price change and its absolute value, then expresses the ratio as a percentage:

TSI = (PCDS / APCDS) × 100

Where:
* PC = Current Close − Prior Close
* PCS = EMA25(PC)
* PCDS = EMA13(PCS) (PC double-smoothed)
* APC = |PC|
* APCS = EMA25(APC)
* APCDS = EMA13(APCS) (Absolute PC double-smoothed)

Typical signal line: EMA7 (or EMA9–EMA12) of the TSI line.

Simple computation steps:
1. Calculate price changes (PC) and absolute price changes (APC).
2. Apply a 25-period EMA to PC and APC.
3. Apply a 13-period EMA to each 25-EMA result (double smoothing).
4. Compute TSI = (double-smoothed PC) / (double-smoothed APC) × 100.
5. Optionally plot a short EMA of the TSI as a signal line.

How to interpret the TSI

Signal line crossovers
* TSI crossing above its signal line can be a buy signal; crossing below can be a sell signal.
* Because crossovers occur frequently, filter them by context (e.g., only take long signals when TSI > 0).

Centerline crossovers
* TSI > 0 indicates positive momentum; TSI < 0 indicates negative momentum.
* Traders often use the centerline for directional bias (e.g., prefer longs only when TSI is above zero).

Divergence
* Bearish divergence: price makes higher highs while TSI makes lower highs — may signal weakening uptrend.
* Bullish divergence: price makes lower lows while TSI makes higher lows — may signal weakening downtrend.
* Divergence can be slow and is an imprecise timing tool; confirm with other signals.

Breakouts and trendlines
* Trendlines drawn on the TSI itself can show momentum breakouts that precede or confirm price breakouts.

TSI vs. MACD

• Both are momentum/trend tools, but they differ in construction:
• TSI double-smooths price changes and expresses them as a normalized oscillator.
• MACD measures the difference between two EMAs of price and typically plots a histogram and signal line.
• They will sometimes give similar signals but often behave differently because of their different smoothing and calculation methods.

Limitations and caveats

• Frequent false signals — especially signal-line crossovers — require filtering and confirmation.
• Divergence signals can persist for a long time before a price reversal occurs.
• Smoothing introduces lag; TSI may change direction before price, or vice versa.
• Overbought/oversold levels are asset-specific and not universal triggers for trades.

Origins

The TSI was developed by William Blau and introduced in Stocks & Commodities magazine in 1991 as a smoother momentum indicator designed to reduce high-frequency noise.

Practical tips

• Use standard settings (EMA25 and EMA13 for smoothing; signal EMA7) as a starting point and adapt to the asset/timeframe.
• Combine TSI signals with price action, volume, trend context, or other indicators to reduce false entries.
• Mark historical extremes for the specific instrument to better define overbought/oversold thresholds.

Bottom line

The True Strength Index is a useful momentum oscillator for identifying trend strength, crossovers, divergence, and potential reversals. It is not foolproof: expect false signals and lag from smoothing. Use the TSI alongside other analysis methods and test parameter settings on the specific market you trade.