What Is The True Strength Index & How To Trade With It

True Strength Index Explained

One of the keys to forex trading is effective use of various technical indicators that allow you to analyse market movements. One such trading tool is the True Strength Index (TSI).

What is the True Strength Index indicator?

True Strength Index (TSI) is a double-smoothed momentum indicator. The indicator in this case turns out smoother, since sharp and minor changes are not taken into account.

The TSI also uses the signal line – EMA, while the trend itself is determined quite simply:

  • If the TSI is above the signal line, then the uptrend is expected;
  • If the TSI is below the signal line, then the downtrend is expected.

In theory, price can range from 0 to infinity. However, the indicator of the True Strength Index ranges from -100 to +100. As a rule, the trend changes when it reaches its extreme value.

The example shows that when the price reaches +25, only two outcomes are possible. The trend can stop at this level or may go down. Thus, the True Strength Index is used not only to determine the trend movement, but also to find the extreme of a trend.

True Strength Index on chart
True Strength Index on chart

Calculation of True Strength Index indicator

The formula of the True Strength Indicator is as follows:

  • EMA – exponential moving average;
  • Momentum – the difference between today’s and yesterday’s closing prices;
  • N – the number of periods used for smoothing (usually a value of 25);
  • N – the number of periods used to smooth out a smoothed valuable moment (value 13).
True Strength Index custom setting
True Strength Index custom setting

For some, the formula of the indicator of True Strength Index may seem unusually complex, but for using it in your day to day forex trading it is not necessary to be an outstanding mathematician. It is enough just to correctly understand the values ​​and apply the indicator to your charts.

How to use True Strength Index indicator?

The priority component of the indicator is the twice smoothed momentum. This allows you to remove unnecessary noise and can help to more clearly determine the price movement.

The main advantage of using the True Strength Index is the timely display of zero level. This allows the trader to conclude a profitable trade on time.

Using True Strength Index indicator
Using True Strength Index indicator

It is important not only learn to determine the trend, but also to find the best prices for opening a position. That is, with a growing trend, we want to buy an asset, and then sell it at the highest possible price.

True Strength Index trading strategy

We can use the SMA (100 period) along with the True Strength Index indicator to find potential buy and sell trading signals.

True Strength Index buy strategy

  • Wait for the TSI to cross the zero level.
  • The TSI line should cross the SMA (100 period).
  • We can buy an asset once a bullish candle appears.
  • We can place stop-loss slightly below the swing area.
  • We can exit the trade in profit once the TSI goes back to zero level.
True Strength Index buy setup
True Strength Index buy setup

True Strength Index sell strategy

  • Wait for the TSI to cross the zero level.
  • The TSI line should cross the SMA (100 period).
  • We can buy an asset once a bullish candle appears.
  • We can place stop-loss slightly below the swing area.
  • We can exit the trade in profit once the TSI goes back to zero level.
True Strength Index sell setup
True Strength Index sell setup

True Strength Index conclusion

The basic principles for using the True Strength Index are described above. You can use the tool as a forex trading strategy or you can even use it as a confirmation tool. Moreover, the best part of this indicator is its function to determine when the trend gets exhausted.

I would prefer to use the majority of technical indicators such as the True Strength Index indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The True Strength Index indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the True Strength Index indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the True Strength Index indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!