True Strength Index (TSI) [ChartSchool]

Blau tsi indicator

Blau tsi indicator

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The quality of the price action bar we identified in Figure 6 isn’t great. Nevertheless, since this is just an example, let’s assume you took a long position when AAPL made a higher high at $.

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This way, if the divergence does play out and the trend reverse, you will at least get out with some gains. If the trend continues, you will be more than happy that you allowed the winning trade to run. Do you remember that trading cliché: cut your losses short and let your winners run ?

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TSI is somewhat unique because it tracks the underlying price quite well. In other words, the oscillator can capture a sustained move in one direction or the other. The peaks and troughs in the oscillator often match the peaks and troughs in price. In this regard, chartists can draw trend lines and mark support/resistance levels using TSI. Line breaks can then be used to generate signals.

True Strength Index (TSI) — Technical Indicators

In trending markets, crossovers happen frequently and then stay at the overbought or oversold area for a long time. Divergences also tend to be unreliable during strong market conditions, because sometimes the indicator shows the divergence for so long that traders end up in the losing side. Hence, it is profoundly advisable to always use the TSI indicator in conjunction with other reliable indicators to filter out the fake trading signals.

Please keep in mind if you change the periods in the true strength index settings, the indicator will respond to price action accordingly. For example, if you calculate the True strength index for 55 periods, you will effectively reduce its sensitivity compared to when calculating for 65 periods.

When the price reaches the overbought level, it does not mean that it is a sell signal. Likewise, when the currency price is at the oversold level, it does not necessarily mean that it is time to buy. Because, sometimes, strong market prices tend to stay at the overbought and oversold area. This is the exact same reason why we always recommend not to use any single indicator standalone. It is always suggested to pair an indicator with other recommended indicators to generate accurate trading signals.

In Figure 7, you can see that when the True Strength Index broke the downtrend line, the momentum changed. However, when the True Strength Index broke below the uptrend line, it turned out to be a false signal. Are you wondering if you should take these kind of trend line breakout signals seriously?

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Once you are long the trade, you might wonder if you should keep the position open or close it with a small profit. If this was a strong candlestick, you may have enough conviction to hold onto the position.

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