Explore the True Strength Index, a powerful momentum oscillator that enhances trading strategies by identifying trend direction and momentum strength.

The True Strength Index (TSI) is a momentum oscillator designed to help traders identify trend direction and momentum strength while reducing market noise. Created by William Blau, it applies a double-smoothing technique to price changes, offering clearer signals compared to traditional oscillators. For a primer on the classic formulation and history, see this overview of the True Strength Index. Here's what makes TSI useful:

  • Key Features:
    • Oscillates around a zero line, typically ranging from -100 to +100.
    • Values above zero indicate bullish momentum; below zero signals bearish momentum.
    • Double-smoothing minimizes false signals and focuses on meaningful trends.
  • Why Traders Use It:
    • Helps distinguish real trend changes from market noise.
    • Identifies bullish/bearish divergences for potential reversals; for a neutral primer on the concept, see divergence in trading.
    • Confirms trend strength by aligning TSI movements with price actions.
  • Applications in U.S. Markets:
    • Effective for stocks, ETFs, forex, and commodities.
    • Works well during high-volatility periods like earnings seasons or FOMC meeting days.
    • Used across different timeframes by day traders and swing traders.
  • How It Works:
    • TSI calculates momentum as the difference in closing prices, applies two exponential moving averages (25-period and 13-period), and normalizes the result to oscillate between -100 and +100.
    • Includes components like the price momentum line, volatility smoothing, and optional signal line for crossover signals.
  • Trading Strategies:
    • Entry signals occur when TSI crosses above zero (bullish) or below zero (bearish).
    • Divergences between TSI and price action can signal trend reversals.
    • Often combined with other indicators like moving averages or support/resistance levels.

LuxAlgo provides tools on TradingView that can complement a TSI-based workflow. While TSI itself is not included in LuxAlgo’s products, traders often overlay TradingView’s native TSI with LuxAlgo indicators to add context, create alerts, and validate momentum ideas. The platform also enables strategy backtesting via LuxAlgo’s AI Backtesting Assistant on luxalgo.com. These capabilities streamline analysis and help turn TSI insights into testable plans.

TSI Indicator Explained: Strategy, Backtest & Rules

How the True Strength Index Works

The True Strength Index (TSI) operates by applying exponential moving averages twice to price momentum data. This dual smoothing process creates a smoother oscillation that remains responsive to real price movements.

TSI Calculation Formula

The TSI calculation unfolds in three key steps, each contributing to the final oscillator reading. First, it determines price momentum by measuring the difference between the current closing price and the previous closing price. This raw momentum data captures all price changes, including short-term market noise.

Next is the smoothing process, where the TSI applies two exponential moving averages. The first uses a 25-period smoothing, and the second applies a 13-period smoothing to the results. This layered approach helps refine the data by filtering out noise while retaining meaningful trends.

Here’s the formula: TSI = 100 × (Double-Smoothed Price Change ÷ Double-Smoothed Absolute Price Change). The double-smoothed momentum is divided by its absolute value to normalize the indicator, helping it remain centered around zero across assets with different price scales.

The final step multiplies the result by 100, scaling it to a range that typically falls between -100 and +100. While extreme readings are rare, this scale makes the indicator easier to interpret. Now, let’s break down the TSI’s components to understand how these calculations translate into actionable trading signals.

Main Components of TSI

The TSI has three main components that work together to generate signals:

  • Price momentum line: This is the backbone of the TSI. It tracks smoothed momentum, revealing whether buying or selling pressure dominates. A move above zero indicates strengthening bullish momentum, while a dip below zero signals growing bearish momentum.
  • Volatility smoothing: The TSI’s standout feature is its ability to filter out short-term fluctuations. By applying two exponential moving averages, it highlights longer-term trends while minimizing noise. The first smoothing step eliminates the most obvious volatility, and the second step refines the signal further.
  • Signal line: Not all TSI setups include this, but when present, it’s typically a shorter exponential moving average (often 7 or 9 periods) of the TSI line. When the TSI line crosses above the signal line, it suggests a bullish momentum shift. A cross below the signal line indicates bearish momentum gaining strength.

These components work together to separate significant trends from random price movements, making the TSI a reliable tool for identifying genuine market shifts. Let’s see how this plays out with a real-world example.

TSI Calculation Example

To understand TSI in action, let’s use Apple Inc. (AAPL) stock data. Here are the closing prices for the week:

  • Monday: $150.00
  • Tuesday: $152.50
  • Wednesday: $151.75
  • Thursday: $154.25
  • Friday: $153.50

First, calculate daily momentum by subtracting consecutive closing prices. For example:

  • Tuesday: $2.50
  • Wednesday: -$0.75
  • Thursday: $2.50
  • Friday: -$0.75

Now apply the first smoothing process using a 25-period exponential moving average. For Friday, the smoothed momentum value is $1.20. The absolute momentum values are also smoothed using the same process, resulting in $1.85 for Friday.

Next, the second smoothing process uses a 13-period exponential moving average. This step refines the smoothed momentum to $1.10 and the smoothed absolute momentum to $1.75. Finally, calculate the TSI:

TSI = 100 × ($1.10 ÷ $1.75) = 62.86

A TSI reading of 62.86 indicates strong bullish momentum for AAPL. This high positive value suggests that buying pressure is significantly outweighing selling pressure. The dual smoothing process confirms that this isn’t just short-term noise but a sustained trend. Traders would interpret this as a sign of solid upward momentum in AAPL’s stock price.

Reading TSI Signals

To make the most of TSI (True Strength Index) signals, it's all about interpreting the oscillator's movements and using them to inform trading decisions. By applying dual smoothing, the TSI filters out noise, making it easier to spot genuine shifts in momentum. These signals are the foundation for the entry and exit strategies we'll dive into later.

Bullish and Bearish TSI Signals

The zero line plays a key role in distinguishing between bullish and bearish conditions. When the TSI moves above zero, it indicates growing bullish momentum. On the flip side, a drop below zero signals increasing bearish pressure. Beyond these crossovers, the slope of the TSI can provide early hints about potential trend changes, helping traders act before the broader market catches on.

Finding Overbought and Oversold Levels

Unlike indicators with fixed thresholds, TSI readings need to be assessed within the specific context of the asset you're analyzing. Extreme TSI values often point to unsustainable buying or selling activity. Overbought levels can suggest that upward momentum is losing steam, while oversold levels may signal an upcoming rebound. Keep in mind that these levels vary depending on the asset's volatility and the overall market environment, so always interpret them with the broader picture in mind.

TSI Divergence Analysis

Divergence between TSI and price action is a useful tool for evaluating the strength of a trend. A bullish divergence occurs when prices hit lower lows, but the TSI forms higher lows, hinting that bearish momentum is fading. Conversely, bearish divergence shows up when prices reach higher highs, but the TSI starts to decline, signaling weakening bullish momentum. Hidden divergences—those that occur over multiple price swings—can also confirm the continuation of a trend, helping traders filter out misleading signals.

TSI Trading Strategies

Building on TSI signal analysis, these strategies turn momentum insights into practical trading plans. The success of TSI trading largely depends on combining its momentum signals with smart timing and solid risk management.

TSI Entry and Exit Timing

When it comes to entries, focus on confirming momentum. A TSI crossing above zero with an upward slope suggests bullish momentum, signaling a potential long entry. On the other hand, a TSI dipping below zero points to bearish momentum, setting the stage for short positions. For exits, watch for a flattening positive TSI, as it often hints at weakening momentum. Similarly, if the TSI starts rising from oversold levels, it might be time to cover shorts or reduce bearish exposure.

Using divergence can refine your timing. For example, if prices hit lower lows while the TSI forms higher lows, wait for the TSI to surpass its recent high before entering. This approach helps weed out false signals and improves the reliability of your entries.

The signal line crossover method offers additional accuracy. Many traders apply a 7-period moving average as a signal line for the TSI. A buy signal occurs when the TSI crosses above the signal line in oversold territory, while a sell signal triggers when it crosses below the signal line in overbought conditions.

For even better results, combine these timing strategies with broader trend indicators to confirm your trades.

Combining TSI with Other Indicators

TSI works well alongside trend-following tools like moving averages. For example, use longer-term moving averages (like the 50-day or 200-day) to identify the overall trend, and then use TSI to fine-tune entries in the same direction. This ensures you’re trading with the trend while leveraging momentum shifts.

For a more complete strategy, combine TSI with support and resistance levels, volume, and price patterns. A bullish TSI divergence near a key support level, for instance, carries more weight than the same signal during a downtrend. Similarly, TSI signals supported by above-average volume are more likely to follow through, while low-volume signals call for caution and tighter stop-losses.

Pairing TSI with price action patterns can also create high-probability setups. For example, when prices break out of consolidation patterns like triangles or rectangles, the TSI should show increasing momentum in the breakout’s direction. If it doesn’t, the breakout may lack strength.

U.S. Market TSI Strategy Examples

Here are some strategy ideas tailored to U.S. markets that incorporate TSI and the techniques discussed above:

  • Large-Cap U.S. Stocks: Use a 14-day TSI setting during earnings season for swing trades lasting 3–7 days. Technology stocks in the NASDAQ-100 often exhibit clear TSI divergences before major reversals.
  • ETF Trading: Sector rotation strategies can benefit from TSI analysis. For example, if the TSI on the S&P 500 (SPY) shows waning momentum while defensive sectors like utilities (XLU) show strengthening TSI signals, it may indicate a shift toward a risk-off environment.
  • Commodity Trading: TSI is particularly effective in energy and precious metals markets. Oil futures (WTI) often show TSI divergences ahead of major trend changes, while gold futures frequently align overbought or oversold TSI readings with reversal points.
  • Currency Markets: The U.S. Dollar Index (DXY) provides valuable TSI opportunities. Divergences on the DXY often precede significant moves in USD-denominated currency pairs, making it a useful tool for forex traders. For contract specifications and context, see the ICE overview of USDX.
  • Day Trading: On shorter timeframes, such as 5-minute or 15-minute charts, use a shorter TSI period (7,3). Focus on the first two hours after the market opens, as momentum signals tend to be most reliable during this time. The TSI can help pinpoint when opening gaps lose steam or when continuation and reversal patterns are likely to emerge.

These strategies show how TSI can be tailored to different markets and trading styles, offering flexibility for traders aiming to capitalize on momentum shifts.

Using TSI with LuxAlgo on TradingView

LuxAlgo Logo

Important: TSI is not part of LuxAlgo’s products. Traders typically add TradingView’s native TSI to their charts and then use LuxAlgo’s exclusive indicators alongside it for confluence, alerting, and decision support. Below are ways LuxAlgo can complement a TSI-based workflow without claiming to calculate or detect TSI-specific signals.

Confluence with Oscillator Matrix

The Oscillator Matrix aggregates multiple momentum and money-flow views. While it doesn’t compute TSI, its money flow data and trend-following signals can be reviewed alongside a separate TSI to validate momentum shifts. For configuration guidance, see the Oscillator Matrix docs, including Smart Money Flow and detailed settings. For broader market context, Multi-Timeframe Market Formation helps align signals across timeframes.

Strategy Design & Testing with AI Backtesting Assistant

LuxAlgo’s AI Backtesting Assistant enables traders to test momentum ideas inspired by TSI concepts (e.g., double-smoothed momentum, centerline logic) across U.S. assets and timeframes. It doesn’t require TSI specifically; instead, you can explore alternative momentum inputs and rules, then iterate rapidly. Learn how to fetch strategies and get started with the platform docs.

Helpful Features When Trading with TSI on Chart

LuxAlgo features that pair well with a separate, charted TSI:

  • Custom Alert Creator: Build precise alert systems for your LuxAlgo indicators to notify you when conditions align with a TSI view you’re tracking on TradingView.
  • Integrated Screener Tools: Use OSC Screener and PAC Screener to surface assets showing momentum or structure conditions that you can then analyze with TSI.
  • Automated Scanner Alerts: During market hours, LuxAlgo’s scanners help surface developing momentum conditions across U.S. stocks and ETFs, which you can cross-check against a TSI overlay.

LuxAlgo also supports traders through its active user community and 24/7 live support. And because these tools run on TradingView, you can view your native TSI together with LuxAlgo’s indicators in a single workspace.

Conclusion

The True Strength Index (TSI) is a momentum oscillator designed to pinpoint trend directions and potential turning points. Its double-smoothing technique reduces market noise while preserving critical momentum signals, making it a practical tool for analyzing U.S. stocks, ETFs, and other financial instruments.

This guide covered TSI's primary signals, including centerline crossovers, divergence patterns, and identifying overbought or oversold conditions. TSI's ability to minimize false signals while highlighting meaningful price movements makes it a reliable choice for both short-term and long-term trading strategies.

To take TSI analysis to the next level, you can combine TradingView’s native TSI with LuxAlgo’s exclusive indicators for confluence and workflow efficiency. While LuxAlgo doesn’t include TSI, its tools—such as integrated screeners, strategy entry rules, strategy scripting, and oscillator-based entries—support testing and operationalizing momentum ideas inspired by TSI principles.

Whether you're exploring momentum analysis for the first time or refining your current TSI strategies, LuxAlgo’s tools offer a solid foundation for achieving more consistent and informed results in today’s dynamic markets.

FAQs

How does the True Strength Index (TSI) stand out compared to other momentum oscillators?

The True Strength Index (TSI) is known for its double smoothing technique, which filters out market noise to deliver clearer and more dependable signals. This approach makes the TSI especially useful for assessing trend strength and momentum, particularly when working with daily charts.

What sets the TSI apart from other momentum oscillators is its ability to blend price momentum with cycle analysis. This combination can help reduce false signals in volatile conditions. For an evergreen overview, see Investopedia’s TSI guide.

How can I combine the True Strength Index (TSI) with other indicators to improve my trading strategies?

To get the most out of the True Strength Index (TSI), try combining it with other tools to confirm trends and fine-tune your trading decisions. For instance, pairing the TSI with moving averages or trend lines can help confirm the direction of a trend. Pay close attention when the TSI crosses key levels like +10 or −10—these often indicate potential entry or exit points.

Another effective strategy is to use the TSI alongside momentum oscillators like the Relative Strength Index (RSI) or the Stochastic Oscillator. This combination can help filter out false signals and improve the timing of your trades.

Can the True Strength Index (TSI) be used for both short-term trading and long-term investing?

The True Strength Index (TSI) is a flexible tool that works well for both short-term trading and long-term investing. As a momentum oscillator, it’s designed to measure trend strength and spot potential reversals.

For short-term traders, the TSI can be fine-tuned to react quickly to price movements, making it useful for identifying timely entry and exit points. Longer-term investors often use longer settings to filter out short-term market noise, allowing them to focus on broader trends.

By adjusting the TSI settings to match your specific timeframe, you can use it effectively across a wide range of trading and investment approaches.

References

LuxAlgo Resources

External Resources