How is the True Strength Index calculated?

The True Strength Index (TSI) is a momentum indicator that evaluates the strength of a price trend. It does this through the calculation of double smoothed price differences, specifically focusing on the differences between closing prices over a set period. The approach consists of applying a series of smoothing techniques on the price movements, which allows TSI to mitigate noise and present a clearer indication of momentum.

The process begins by calculating the price difference from one closing price to the next, followed by double smoothing these values. This means that an exponential smoothing technique is applied twice, which enhances the reliability of the indicator by reducing false signals that can arise from short-term price fluctuations. Ultimately, this method of calculation allows traders and analysts to assess trends and potential reversals more effectively.

This method stands in contrast to averaging close prices, comparing highs and lows, or relying on simple moving averages, which do not provide the same depth of analysis regarding momentum and trend direction that TSI offers. Using the double smoothed price differences allows for a more nuanced view of price action and strength, distinguishing it from simpler methods.