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True Strength Index (TSI) Forex Technical Analysis and TSI Forex Trading Signals

Developed by William Blau

 

True Strength Index is a momentum indicator. The TSI is plotted by using a momentum calculation that reacts faster and is more responsive to price changes, making it a leading indicator that follows price action direction closely in the foreign exchange market.

 

The True Strength Index is plotted as a blue line, the indicator also plots a signal line which is plotted as a red line, and these two lines are used to generate crossover signals.

 

True Strength Index also plots a histogram which shows the difference between the TSI Line and the Signal line. This histogram crosses above or below the center lines, histogram levels above the center line shows a bullish crossover signal, while center line levels below the center line shows a bearish crossover signal.

True Strength Index (TSI) Technical Indicator


 

Forex Technical Analysis and Generating Forex Trading Signals

The TSI uses various methods to generate trading signals. This indicator can be used in the same way as the RSI to determine general trend direction of the currency markets. Overbought and oversold levels can also be shown using TSI. The most common methods of generating trading signals are:

 

Zero line Crossover (Histogram crossover not Lines crossover)

  • Buy - when the histogram crosses above 0 a buy is generated
  • Sell - when the histogram crosses below 0 a sell is generated

Technical Analysis of True Strength Index (TSI) Technical Indicator


 

Signal line Crossover

  • A buy is generated when the TSI line crosses above the Signal line
  • A sell is generated when the TSI line crosses below the Signal line

 

This signal is the same as the one above and the timing corresponds to the time when the histogram crossovers happen.

 

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Divergence Trading

Divergence is used to look for potential trend reversal point of a currency pair. The reversal divergence setups are:

 

Classic Divergence

Classic Bullish Divergence: Lower lows in price and higher lows on the indicator

Classic Bearish Divergence: Higher highs in price and lower highs on the indicator

 

Divergence trading can also be used in identifying potential trend continuation points in price action direction. The continuation divergence trading setups are:

 

Hidden Divergence

Hidden Bullish Divergence: higher lows in price and lower lows on the indicator

Hidden Bearish Divergence: lower highs in price and higher highs on the indicator

 

 

Overbought/Oversold Levels

This can be used to identify overbought and oversold conditions in price action movements.

  • Overbought condition - levels being greater than the +25 level
  • Oversold condition - levels being less than the -25 level

 

Trades can be generated when the TSI crosses these levels.

Buy signal - when the levels cross above -25 level a buy is generated.

Sell signal - when the levels cross below +25 level a sell is generated.

Oversold Levels - Buy Forex Trading Signal

Oversold - Buy Signal

 

Overbought Levels - Sell Forex Trading Signal

Overbought - Sell Signal

 

The overbought/oversold levels are indicated using horizontal lines plotted at the +25 and -25 levels.

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