View source for True strength index

{{Short description|Technical indicator used in the analysis of financial markets}}
The '''true strength index''' ('''TSI''') is a [[technical indicator]] used in the analysis of [[financial markets]] that attempts to show both trend direction and overbought/oversold conditions.  It was first published by William Blau in 1991.<ref>
{{cite journal
 | journal = (Technical Analysis of) Stocks & Commodities
 | title = True Strength Index
 | author = William Blau
 | volume = 11
 | issue = 1
 | publisher = traders.com
 | pages = 438–446
 | date = Nov 1991
 | quote = 
 | url = http://store.traders.com/-v11-c01-sidetru-pdf.html
 }}</ref><ref>
{{cite journal
 | journal = (Technical Analysis of) Stocks & Commodities
 | title = Stochastic Momentum
 | author = William Blau
 | volume = 9
 | issue = 11
 | publisher = traders.com
 | pages = 11–18
 | date = Jan 1993
 | quote = The true strength index (TSI) I introduce here is based on momentum as it occurs in nature, with no need to segregate up and down components of the momentum. ... The double-smoothed true strength index gives a choice to the trader; selection of the smaller smoothing time can be made to satisfy individual trading personalities. ... Calculating the true strength index requires an introduction to exponentially smoothed moving averages (EMA)
 | url = http://store.traders.com/-v11-c01-sidetru-pdf.html
 }}</ref>
The indicator uses [[moving average]]s of the underlying [[Momentum (technical analysis)|momentum]] of a financial instrument.<ref>{{cite book|author=Blau, William |title=Momentum, Direction, and Divergence: Applying the Latest Momentum Indicators for Technical Analysis |publisher=Wiley |date=1995-03-06 |isbn=978-0-471-02729-4}}</ref><ref>
{{cite book
 | title = Trading with oscillators: pinpointing market extremes—theory and practice
 | author = Mark Etzkorn
 | publisher = John Wiley and Sons
 | year = 1997
 | isbn = 978-0-471-15538-6
 | pages = 91–93
 | url = https://books.google.com/books?id=MAcar1r3gEgC&pg=PA93
 }}</ref> Momentum is considered a [[leading indicator]] of price movements, and a moving average characteristically lags behind price. The TSI combines these characteristics to create an indication of price and direction more in sync with market turns than either momentum or moving average.<ref name="hartle">{{cite journal |author=Hartle, Tom |title=The True Strength Index |url=https://www.tradestation.com/discussions/Data/2002125162918_AT-TSI%20JAN2002.pdf |format=PDF |magazine=Active Trader |date=January 2002}}</ref> The TSI is provided as part of the standard collection of indicators offered by various trading platforms.

==Calculations==
The TSI is a "double smoothed" indicator; meaning that a moving average applied to the data (daily momentum in this case) is smoothed again by a second moving average. The calculation for TSI uses [[exponential moving average]]s. The formula for the TSI is:

:<math>TSI(m,r,s) = 100 \frac{EMA(EMA(m,r),s)}{EMA(EMA(|m|,r),s)}</math>

where
:''c''<sub>0</sub> = today's closing price
:''m'' = ''c''<sub>0</sub>&nbsp;&minus;&nbsp;''c''<sub>1</sub> = momentum (difference between today's and yesterday's close)
:''EMA''(''m'',''n'') = exponential moving average of ''m'' over ''n'' periods, that is,
::<math>EMA(m_0,n)=\frac{2}{n+1}\left[m_0-EMA(m_1,n)\right]+EMA(m_1,n)</math>
:''r'' = EMA smoothing period for momentum, typically 25 
:''s'' = EMA smoothing period for smoothed momentum, typically 13

==Interpretation==
While the TSI output is bound between +100 and &minus;100, most values fall between +25 and &minus;25. Blau suggests interpreting these values as overbought and oversold levels, respectively, at which point a trader may anticipate a market turn. Trend direction is indicated by the slope of the TSI; a rising TSI suggests an up-trend in the market, and a falling TSI suggests a down-trend.<ref name="hartle"/><ref>
{{cite book
 | title = The options trading body of knowledge: the definitive source for information
 | author = Michael C. Thomsett
 | publisher = FT Press
 | year = 2009
 | isbn = 978-0-13-714293-4
 | page = 268
 | url = https://books.google.com/books?id=icIQyXSaLu8C&pg=PA268
 }}</ref>

==See also==
*[[Relative Strength Index]]

==References==
{{reflist}}

{{technical analysis}}

[[Category:Technical indicators]]