The Trend Strength Indicator (TSI): A Guide to Mastering Stock Trading

July 24, 2023

Blog & Resources

By Dan Taylor

Finding the right market instrument to trade can feel like searching for a needle in a haystack. The financial market is a vast universe filled with countless options, each boasting its unique merits and pitfalls.

This overwhelming abundance necessitates an effective compass to navigate the trading landscape—a reliable trend strength indicator. This article will explore MarketGauge's innovative Trend Strength Indicator (TSI) and how it can help you take your trading to the next level.

What Is the TSI?

TSI is MarketGauge's proprietary Trend Strength Indicator. Unlike your run-of-the-mill trend strength indicators, TSI goes above and beyond to offer strategic edge in market trading. It assesses the relative strength of market instruments across multiple timeframes, creating a comprehensive snapshot of market performance.

More than just a best indicator for trend strength, TSI brings versatility to the table. It can be applied to various markets, including the NASDAQ 100, different sectors, countries, large-cap leaders, and even small caps.

At the heart of MarketGauge's ETF models, TSI plays a pivotal role in determining which ETFs to hold, ensuring that traders get the most out of their strategies.

The Mechanics Behind TSI: Why It Outperforms Other Methods

The secret to TSI's effectiveness lies in its unique methodology. It uses a weighted average/return type calculation, with proprietary weights spanning several months.

This algorithm differs significantly from other trend strength indicators which may focus only on recent performance. TSI, in contrast, provides a more comprehensive view, allowing you to understand an instrument's performance over a wider time horizon. Also, unlike simpler indicators that might measure price changes over a singular period, TSI integrates multiple data points. It uses weighted returns from multiple time frames, notably six months, feeding a broader spectrum of data into the calculation. This approach smoothens distortions you might encounter with other methodologies.

Let's illustrate this with a hypothetical example: Imagine two stocks, Stock A and Stock B. Both have shown impressive gains over the past month, making them attractive to day traders and momentum investors.

  • Both stocks look great over the short term: Let's assume a traditional indicator assesses their strength based on the last 30 days alone. Both stocks will likely rank similarly, as their recent performance has been comparable.
  • But at six months, their performance is different: Imagine that over the past six months, Stock A had been on a steady upward trend with occasional, moderate pullbacks. In contrast, Stock B had several dramatic peaks and troughs, indicating volatility.
  • TSI incorporates both: A traditional indicator might not capture this difference, as it's heavily skewed towards recent performance. However, TSI, with its unique approach, will differentiate these stocks based on their longer-term trend strength. It might rank Stock A higher, as it shows more consistent strength over the assessed period.

In this way, TSI offers a broader and more nuanced understanding of trend strength, helping traders make informed decisions. It's not just a trend strength indicator—it's a powerful tool designed to navigate the complexity of the markets.

The Advantages of Using TSI

TSI is more than just an indicator to show strength of trend. It's a multi-faceted tool that enhances your trading strategy in several ways. Here are some advantages of using TSI:

  • Identify Market Leaders: TSI operates on the principle that 'Leaders keep leading.' It aids in identifying the strongest instruments, which, history suggests, continue to lead. This allows you to focus on instruments with the highest potential for returns.
  • Accuracy: TSI outperforms simple ranking systems, providing a more accurate method for finding and ranking market leaders. Its sophisticated algorithm is a marvel, offering value that is difficult to replicate manually.
  • Versatility: TSI proves its worth across various markets, from the NASDAQ 100 to small-cap stocks. Its adaptability makes it a go-to for traders in diverse markets.
  • Risk Management: Effective trading isn't just about identifying profitable opportunities; it also involves managing risk. MarketGauge's approach to trading includes a risk management strategy—setting targets and stops. TSI fits neatly into this framework, optimizing your trading outcomes. MarketGauge also emphasizes the importance of timely portfolio rebalancing. Twice annually, portfolios undergo a process of rebalancing, ensuring alignment with money management rules. TSI seamlessly integrates into this approach, helping traders understand when and how to rebalance for optimal outcomes.
  • Sector Rotation: TSI isn't just about individual instruments. You can also use it to identify high-performing sectors, optimizing your chances of achieving high returns.

Profitable Use of TSI: Real-world Applications

Consider a scenario contrasting the SPY and SH ETFs. With a keen observation on the TSI scores, one could have potentially avoided the severe 50%+ drawdown resulting from the 2008 financial crisis. In real terms, using the TSI could have meant a portfolio up by almost 50%, rather than being down by 20%. It's such real-world applications that set the TSI apart.

The reality is that you're not just looking for a trend strength indicator; you need a tool that directly contributes to profitability. TSI does just that. Here's how you can use TSI for profit:

  • NASDAQ 100 All Stars: This is a simple yet effective application of TSI. It involves buying the top five NASDAQ 100 stocks ranked by TSI every month. This straightforward strategy has a track record of consistently outperforming the market.
  • ETF Sector Plus Strategy: Sector rotation is a key strategy used by top traders and fund managers. With TSI, you can identify the highest-performing sectors. The potential edge here is significant—the gap between the best and worst-performing sectors can sometimes be as wide as 68 percentage points.

A profound understanding of the TSI can lead to strategic shifts in portfolio holdings. For instance, a focus on ETFs in the strongest trends can result in substantial market outperformance.

Explore MarketGauge’s TSI-Powered Tools to Become a Better Trader

The quest for the best trend strength indicator may seem daunting, given the multitude of options available. However, the answer may be simpler than you think. MarketGauge's Trend Strength Indicator (TSI) offers a comprehensive, versatile, and reliable tool for traders seeking to navigate the markets strategically.

Its unique algorithm goes beyond traditional trend strength indicators, providing a broader perspective of the market over multiple timeframes. Its application extends across various markets, sectors, and even countries. In addition, it fits neatly into a broader risk management strategy, making it an integral part of your trading toolkit.

MarketGauge offers numerous products that are powered by the TSI and can help you level up your trading game. Check them out and let us help you become a better trader.