True Stength Index
by William Blau
Price momentum oscillators are popular tools for traders because the nature of these technical tools is
to signal trend changes, something every trader wants to know. The ideal indicator would alert the trader
to a change in the trend from a down market, at the low of the trend to an up market, correctly indicate
that the up trend was in force until the absolute high and then signal the new trend. While this indicator
may or may not exist, my own work has led me to the use of applying various smoothing techniques to
changes in price. Many changes in price from one level to the next are properly considered to be random
or noise. However, if the noise can be filtered or smoothed out, then the trend should be recognizable.
Before discussing the smoothing of price changes, let's start with some basics.
Figure 1 depicts a section of a price a chart showing the daily close (open, high and low of the price bar
are omitted). Momentum is defined as the close minus the close at an earlier time. The daily momentum
is today's close minus yesterday's closeŚ for example, the one-day momentum = Mtm = close - close.
On November 3, the value of the close is C. On the preceding day the value of the close is C. The one
day momentum for the November 2nd to November 3rd interval is a positive number as shown: the close
has increased in value in one day. The slope of the close curve is positive, a rising price. Momentum is
increasing from one day to the next.