True Strength Index AKA TSI is a momentum indicator developed by William Blau. If you like to know more about the work of Williams Blau, we suggest you read his book “Momentum, Direction and Divergence.”
This indicator is based on the double smoothing of price changes. TSI fluctuates between the positive and negative territories, and the centreline of the indicator defines the overall bias. This indicator is useful for determining the oversold and overbought conditions in the market, and it also warns the weakening of the trend through the divergence. It also indicates the direction of the future trend via the centerline crossovers.
When the TSI is positive, it indicates strong bullish momentum, and when the TSI is negative, it indicates a strong bearish momentum in the market. This indicator quickly captures a sustained move in the market in one direction or the other, which makes it unique.
TSI indicator is based on the price movements, so the overbought and oversold levels will vary by the currency that is being traded. Some currency pairs reach the +40 and -40 levels before tending to see the price reversals, while others reverse near the +10 and -10 levels. We suggest you mark the extreme levels on the chart, to see where the oversold and overbought levels are.
When the price reaches the overbought level, it does not mean that it is a sell signal. Likewise, when the currency price is at the oversold level, it does not necessarily mean that it is time to buy. Because, sometimes, strong market prices tend to stay at the overbought and oversold area. This is the exact same reason why we always recommend not to use any single indicator standalone. It is always suggested to pair an indicator with other recommended indicators to generate accurate trading signals.
In this article, we have shared some of the strategies built around the TSI indicator. You can use those strategies to generate accurate buy/sell signals.
Installing ‘TSI Indicator’ in MT4 (step – by – step process)
By default, the TSI indicator is not available in the MT4 Terminal, but it is available on the internet. Follow the link below to download the indicator.
Download the zip file from the link and extract the file and paste it to your MT4 directory/MQL4.
Make sure to paste it in the ‘indicators’ folder.
Restart your MT4 Terminal.
Click on the Insert > Indicator > Custom > TSI indicator.
As you can see in the image below, we have applied the TSI indicator on the CHF/JPY chart.
TSI indicator trading strategies
True Strength Index and Support & Resistance levels
Support/Resistance levels generally act as a barrier for the price. It prevents the price of currency from getting pushed in one direction. Every technical trader uses the S&R levels in their trading activities. In this strategy, we have combined the Support/Resistance levels with the TSI indicator.
As you can see in the image below the line on the chart first acts as a support and then it acts as a resistance. The indicator’s line follows the price action on the chart. You need to find out where the indicator is acting as a support, and where it is breaking below that support line. Then we need the price to come back to the resistance line to take a trade.
True Strength Index and RSI Divergence
Divergence trading is quite popular in the market. Banks, Hedge Funds and professional traders around the globe often use the divergence to find out the trend reversal in the market.
In this strategy, we paired the TSI and RSI indicator to trade the divergence. RSI is known as the Relative Strength Index. It is a very popular indicator in the trading community. RSI is an oscillator, and it oscillates between the 0 to 100 levels. When the RSI reaches 70 levels, it means that the market is in overbought condition and is expecting a trend reversal. Likewise, when the indicator is near the 30 levels, it shows us the market is approaching the oversold conditions, and it may reverse soon.
As you can see in the below EUR/USD 15min chart, the market was making a higher high, but both indicators are moving sideways. RSI and TSI indicate the trend reversal in the market, and this is a bearish reversal.
As you can see in the below EUR/USD 15min chart, the market is moving in a downtrend, and the price is making new lower lows. but both indicators failed to make a lower low. This can be considered as a bullish divergence. Divergence is a leading strategy as it will warn you about a trend change ahead of time.
Limitations of the True Strength Index
So sometimes, when the market trend is strong, TSI often gives false signals. For instance, when the market is in a strong trend, the TSI may cross below the centreline. But the price proceeds higher even though the indicator momentum has shifted to the downside.
In trending markets, crossovers happen frequently and then stay at the overbought or oversold area for a long time. Divergences also tend to be unreliable during strong market conditions, because sometimes the indicator shows the divergence for so long that traders end up in the losing side. Hence, it is profoundly advisable to always use the TSI indicator in conjunction with other reliable indicators to filter out the fake trading signals.
TSI is one of the most important leading indicators in the market. It is a unique oscillator as it identifies both the trend direction and the strength of the trend. If you are willing to change the indicator settings, always remember to change it based on the currency volatility. Otherwise, you will end up getting a lot of false signals. If you use this indicator in conjunction with some other reliable tools, it can help you in generating accurate trading signals. Happy Trading!