What Is The TDI Indicator & How To Trade With It

The Traders Dynamic Index (TDI) is a versatile trading indicator that is based on a combination of technical analysis. The TDI indicator implements the standard RSI indicator, which determines the strength of the current trend, or if you want, the rate of change in price. The moving averages algorithm is used to smooth the lines, and Bollinger bands are used to estimate the amplitude of the oscillations. Thanks to an integrated approach, the TDI indicator alone can be used as a complete trading system.

What is the TDI indicator?

The green line is a smooth RSI line with a small period. Red has a longer smoothing period and is called a signal. RSI is not used in its pure form; its values ​​are used only for calculating the fast and signal lines. Bollinger Band lines are also plotted based on RSI readings, but not smoothed values. The yellow line is the average between the upper and lower lines of the channel. 3 of these lines reflect market strength and current volatility.

TDI indicator on chart
TDI indicator on chart

TDI indicator parameters

  • Period for calculating the RSI indicator. A value between 8 and 25 is often used whilst the optimum period is 13.
  • Selection of the initial price for the Relative Strength Index. By default, the closing price is used.
  • A period of standard deviation is used to calculate the boundaries of volatility (Bollinger Bands). The lower the value, the lines are more sensitive to changes.
  • Smoothing the RSI fast line.
  • The way to smooth. By default, a simple average.
  • The smoothing period of the RSI slow line.
  • The way to smooth the line.
TDI indicator parameters
TDI indicator parameters

How to use the TDI indicator?

The TDI indicator simultaneously shows the direction and strength of the current trend, by which we can try to determine the right moment to enter trade positions. Despite the complex nature, understanding the operation of the indicator is quite simple – you need to determine the signals and understand what they mean.

TDI indicator trend direction

First of all, the indicator can be used to determine the current trend. The green line above the red signals a change in the short-term trend to an uptrend. When green falls below red, the short-term trend changes to a downtrend.

The yellow line shows a long-term trend. Mostly, it does not go beyond 68 and 32. When the line pushes off from these borders, it signals a possible change in trend.

TDI indicator trend direction
TDI indicator trend direction

TDI indicator market strength & volatility

The indicator also signals the current market strength. Usually, the greater the slope of the green line, the stronger the market players. If the line moves more horizontally than vertically, we may be dealing with an extremely inert market that is ranging. This could be beneficial for those who are using range trading strategies.

The expansion of the Bollinger bands signals an increase in volatility. The narrowing of the lines, on the contrary, indicates a decrease in volatility and a weakening market. With a strong narrowing of the lines, one may expect the release of any important reports or other news that can dramatically move the market. In such cases, it may be better to refrain from trading unless you are implementing a news trading strategy.

TDI indicator market strength
TDI indicator market strength

TDI indicator trading signals

One way to get trading signals from the TDI indicator is to open a buy deal when the green line crosses the red line in the direction of the uptrend. Similarly, you may open a deal to sell when the green line is below the red. For more conservative traders, a buy position could be entered when both lines are above the yellow. Accordingly, in the case of a sale, the green and red lines could be below the yellow line.

TDI indicator trading signals
TDI indicator trading signals

There is also a variation of the strategy for forex swing trading positions with a transaction holding time from several days to several weeks. The rules are the same as for the conservative strategy, with the exception that all three lines should be above level 50 in case of purchase and lower – in case of sale. Ideally, Bollinger bands should indicate an increase in volatility; that is, the lines should diverge.

TDI indicator trading strategy

In addition to the TDI indicator itself, we can use Heikin Ashi from the Ichimoku Kinko Hyo.

Entering a buy position is when the green line crosses the red line from the bottom up during the first two candles of Heikin Ashi. The same thing, just the opposite for a sell trade. That is, both indicators should show a change in trend at about the same time.

It may be worth leaving the deal when the green line begins to bend or shows signs of a reversal, becoming horizontal. Stop-loss can be set at a recent level of support or resistance.

TDI indicator - buy & sell setup
TDI indicator – buy & sell setup

TDI indicator conclusion

The Traders Dynamic Index indicator is a trend following momentum indicator based on the RSI. The RSI calculation itself applies slightly different settings than the standard RSI version. First, the standard setting use a 13 period average, not the standard RSI 14 period. Secondly, a smoothing period of 2 is used vs. the customary 3 bars applied to the standard RSI. Finally, one may note that the Traders Dynamic Index indicator apply the SMA as the basis for its calculation, not the EMA used for the standard RSI.

The TDI indicator is a 3-in-1 indicator that can anticipate trend direction, momentum and market volatility. The TDI indicator can be sensitive to the current market environment and be implemented into short, mid and long term trading strategies.

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