What is the True Strength Indicator (TSI) and how to use it on IQ Option. Learn about its 4 most important use cases


true strength index IQ OptionToday, 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.

Key Takeaways🔑

True Strength Indicator (TSI) is a momentum oscillator used for trend identification and determination of oversold and overbought areas.
TSI can be used to catch divergences, define the trend, and highlight price momentum in the short term.
Always use additional techniques to confirm trading signals and entry points provided by TSI.

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.

How to insert True Strength Index on IQ Option
How to insert the True Strength Index on IQ Option

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.

TSI on AUDUSD 5-minute chart
True Strength indicator on the AUDUSD 5-minute chart

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.

TSI over 30 means that the market is overbougth and TSI under -30 is a inddication of market being oversold
TSI over 30 means that the market is overbought and TSI under -30 is an indication of the market being oversold

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 of TSI lines can be used as a trading signals
Crossovers of the TSI lines can be used as trading signals

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.

Bearish divergence on the True Strength indicator
Bearish divergence on the True Strength indicator

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.

Pros and Cons👍👎

  • Pros:
  • ✅ TSI helps identify trend direction and strength
  • ✅ Provides information on oversold and overbought zones
  • ✅ Can be used to detect divergences and potential trend reversals
  • Cons:
  • ❌ TSI may generate false signals
  • ❌ Divergences can last for an extended period, making it challenging to identify exact entry points
  • ❌ Requires additional techniques or tools for confirmation


Trading Signals Signal Confirmation
Oversold and Overbought Areas TSI changing direction back to the middle or signal line crossover
TSI and Signal Line Crossover Use an extra technique, such as filtering crossover signals based on TSI’s positive or negative value
Crossovers with the Middle Line Open long trades only when TSI is positive and short trades when TSI is negative
Divergences Use another method to find the best point for transaction entry

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!

Q&A Section💡

  • Q: What is the True Strength Indicator (TSI)?
  • A: TSI is a momentum oscillator used for identifying trends, determining oversold and overbought areas, and detecting divergences.
  • Q: How can TSI be used to identify trend direction?
  • A: When TSI is in positive territory, it indicates that bulls control the market; when it’s in negative territory, bears are in control.
  • Q: How can TSI be used to determine oversold and overbought areas?
  • A: TSI values can be analyzed to identify extremes reached by an asset’s price and decide its oversold and overbought zones.
  • Q: What are the limitations of TSI?
  • A: TSI may generate false signals, divergences can last for an extended period, and it requires additional techniques or tools for confirmation.
  • Q: How can you improve the accuracy of TSI trading signals?
  • A: Use additional techniques or tools to confirm trading signals and entry points provided by TSI.

GENERAL RISK WARNING

The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.
Kindly note that this article does not provide any investment advice. The information presented regarding past events or potential future developments is solely an opinion and cannot be guaranteed as factual, including the provided examples. We caution readers accordingly.

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Bart Bregman

Author / IQ Option expert: "My name is Bart Bregman, I have 9 years of full-time professional trading experience. I've been trading with IQ Option for more than 7 years, mainly on the shorter time frames doing technical analyses, and have many experience with Binary Options, CFDs, Options, and Crypto trading. There is no such thing as a bad trade! As a digital nomad trader, I'm mostly traveling all over the world. Follow my journey on Instagram at https://www.instagram.com/bart_bregman/. "

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