Today, you are going to get to know the True Strength indicator known also as the True Strength Index. IQ Option has various indicators available on the trading platform. Indicators are used in technical analysis to improve market readings and to help in the decision-making process about entering or exiting transactions. It is good to learn how they work and use the ones that suit you in your trading.
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How do you read a true strength indicator?
The True Strength Index, known as the TSI in short, belongs to the oscillators. Traders use it to identify the trend and its reversal as well as to determine the oversold and overbought areas.
The indicator appears in a separate window beneath the price chart. It consists of 2 lines that run to the positive or negative territory. When it is in a positive zone it means the bulls have control of the market and the negative zone means the bears are in majority.
Using the True Strength indicator in trading on the IQ Option platform
The True Strength indicator provides quite a lot of information. It can be utilised to identify the oversold and overbought areas, catch divergences, define the trend and the changes in its direction, and highlight price momentum in the short term.
Oversold and overbought areas
There are no strict rules as to when the asset falls into the oversold or overbought areas. The values may differ for distinct instruments. One can be considered oversold and overbought near -20/+20, another at -30/+30.
You have to do some research about the extremes the price reaches and decide what are the oversold and overbought zones for this particular asset.
Bear in mind that information about an asset in the oversold or overbought zone does not constitute a trading signal. You ought to watch for other signals as the TSI changing its direction back to the middle or signal line crossover.
Signal line and the TSI line crossover
A signal line of the True Strength Index is the EMA with the period usually set between 7 to 13. A crossover is when the TSI line intersects the signal line. If it passes the signal line from above, you may want to sell. When the TSI line crosses the signal line from below, you may consider buying.
Such crossovers happen regularly, though. Use an extra technique to confirm your entry points. For instance, you may filter crossovers signals by looking for an opportunity to buy when the TSI is positive (above the 0 line) and to sell when it is negative (below the middle line).
Crossovers with the middle line
The middle line has a value of 0. As I mentioned before, when the True Strength indicator rises above this line, it is positive which further means the bulls are in control. When the indicator drops below the 0 line, the bears are more in control and the price momentum is negative.
Traders may decide they will look for the right moment to open a long trade only when the TSI is positive and to open a short position only when the TSI is negative.
Divergences
A divergence occurs when the price and the indicator do not go in the same direction. Divergences can be bullish or bearish. Bullish divergence happens when the price decreases but at the same time the TSI is rising. A bearish divergence can be identified when the price increases and the TSI is falling.
Divergences may be indicating that the trend is getting weaker and its reversal is expected. However, even with a divergence spotted it might be difficult to find the exact moment to enter as it may continue for some time. So use another method to find the best point for your transaction.
Summary
The True Strength Index is a momentum oscillator that can be used by traders in various ways. You can identify the trend with it, define oversold and overbought zones, trade crossovers, or catch divergences.
The rules for trading with the TSI are not complicated, nonetheless, you should remember that perfect indicators do not exist. False signals may be obtained and divergences may last a long time. To be able to recognise the right moment to open a trading position it should be confirmed in other ways. You may use a different element of the True Strength indicator or other forms of analysis.
First, discover the True Strength Index potential in the IQ Option demo account. You will open transactions with virtual cash. Your money will be safely waiting in the live account for you to be ready to invest them.
Wish you good luck!