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True Strength Indicator


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True Strength Indicator

The True Stregnth Indicator is a technical momentum indicator that helps traders determine trend as well as overbought and oversold conditions of a security by incorporating the short-term purchasing momentum of the market with the lagging benefits of moving averages.

A variation of the Relative Strength Index, developed by William Blau, it uses a differencing function to measure momentum and an averaging function to correlate the momentum to the price trend. In other words, the indicator combines the leading characteristic of a differencing momentum calculation with the lagging characteristic of an averaging function to create an indicator that reflects price direction and is in sync with market turns.

The averaging function used to create the TSI is called double smoothing, a process by which a first exponential moving average (EMA) is applied to the data (in this case, momentum), and then a second shorter-term EMA is applied to the result of the first EMA calculation. The result is a smoother line that introduces less lag than a single EMA with a longer period length. The formula for the TSI is:

TSI(close,r,s) = 100xEMA(EMA(mtm,r),s)/EMA(EMA(|mtm|,r),s)

where

mtm = closetoday closeyesterday

EMA(mtm,r) = exponential moving average of mtm with period length = r

EMA(EMA(mtm,r),s) = exponential moving average of EMA(mtm,r) with period length = s

|mtm| = absolute value of mtm

r = first period (default 25)

s = second period (default 13)