True Strength Index (TSI) is a momentum indicator created by William Blau. This indicator is popular because it blends characteristics of leading and lagging indicators. Momentum indicators are usually aggressive and act as leading indicators. Smoothening indicators, such as Moving Average, are lagging indicators. While leading indicators are aggressive and show frequent shifts, lagging indicators are more stable even though lagging. TSI is a momentum indicator that combines the qualities of both the type of indicators.

Calculation of TSI

Calculation of TSI involves double smoothening of Price change (which represents Trend) and Volatility. The steps to calculate TSI is as follows:

1. Calculate 25-period EMA of Price change. Here, price change = Current close minus the previous close.

2. Calculate the 13-period EMA of the 25-period EMA of Price change. This will give us the double smoothening of Price change.

3. Calculate 25-period EMA of Volatility. Here, Volatility here refers to the magnitude of price movement, regardless of direction. Calculate this by taking the absolute value of the price change. This means if a price decreases by 50 points in a period (-50), it will be taken in absolute terms i.e, it will be considered as 50.

4. Calculate the 13-period EMA of the 25-period EMA of Volatility. This will give us the double smoothening of Volatility.

By smoothening out the 25-period EMA of Price change and Volatility in step 2 and 4, we are essentially removing the noise from Volatility and Price change. Finally, we divide the double smoothened Price change by double smoothened Volatility to arrive at TSI.

By dividing Price change with Volatility, we are looking at the ratio of Trend and Volatility. When the TSI line is rising, it shows the trend bullish and in momentum. When the TSI line is falling, it shows the trend is bearish and in momentum.

William Blau recommended a 25, 13, and 7 setting for this indicator. The 25 and 13 is used in the TSI calculation. 7-period EMA is an EMA calculated based on the TSI line. This line is also called the signal line. TSI line and Signal line fluctuate between positive and negative territory.

Interpretation of TSI line and signal line

Interpreting TSI using the signal line is one of the most common ways. The interpretation is:

When the TSI line is above the signal line and in positive territory, the trend is bullish and in a bullish momentum.

When the TSI line is below the signal line and in the negative territory, the trend is bearish and in a bearish momentum.

How to trade using TSI

TSI is an indicator best used on Point & Figure charts. This indicator can help a trader participate in strong trend. When the TSI line is above the signal line, it indicates a strong bullish trend. We can add double Moving Average to give an additional sense of strength to us.

A simple trade setup can be when TSI is above the signal line and is positive territory, we can trade a simple Double Top Buy (DTB) pattern in relatively outperforming stocks. Although pullbacks towards the double EMA line are very rare when TSI is above signal line and in positive territory, they can be rewarding to trade.

Observe the chart below of JUBLPHARMA and HDFCAMC on 0.5% (Daily). Observe how clean the charts were when the TSI line (green line) was above the Signal line (red line) and above Zero. The DTB is marked as a black line. Both the stocks were Relatively outperforming the broader markets.

How about trading 1% (Daily) charts using TSI? The same principle applies on this box size as well. The chart below is of INDUSTOWER on 1% (Daily). DTB when TSI was above the signal line is marked below.

No trading system is flawless—some DTB patterns shown above failed in the very next column, and that is perfectly normal. Losses and failed setups are part of the process. What matters more is consistent learning and structured improvement.

If you found this newsletter valuable, consider forwarding it to fellow traders who might benefit too. And if you are serious about growing as a trader, explore the TNT One membership. It offers over 200 hours of in-depth content on trading and technical analysis—designed to guide you whether you are just starting out or looking to refine your edge.

Discover what TNT One can offer you through the link below 👇👇👇