The TDI Indicator (Traders Dynamic Index) – RSI in three timeframes

TDI setups and signals

In this Indicator Spotlight, we’re looking at the Traders Dynamic Index (TDI), an indicator that combines the RSI in three (3) timeframes along with the Bollinger Bands. To learn more about the RSI and the TDI indicator, check out this video, or continue reading below:

The Relative Strength Index (RSI)

The RSI is among the most popular oscillators and was first introduced by Welles Wilder in his book, New Concepts in Technical Analysis (1978). The indicator was developed to address two common issues seen with momentum calculations:

  • Erratic output caused by values being dropped off in the lookback period
  • Lack of a constant benchmark in order to facilitate comparisons

To minimize price distortions, Wilder therefore added smoothing to the momentum calculation and furthermore, created a constant vertical range from 0 to 100. Values above 70 indicate overbought and below 30 oversold scenarios. However, initial moves into the overbought/oversold areas are often simply early warnings and the price move may still continue. To avoid premature exits, Wilder therefore combines the oscillator analysis with setting of higher highs or lower lows, in order to identify price failure swings or divergences. In combination with other tools, the RSI can also be used to identify entries, i.e. when crossing above/below the 30 /70 thesholds.

Wilders RSI

The TDI indicator: RSI in 3 timeframes

There are different variations of Wilder’s original RSI, such as the Slow RSI, Connors RSI and the Laguerre RSI (all available from the LizardIndicators.com library). The TDI indicator also applies the RSI, with a few minor adjustments. First, a 13 period average is used, as opposed to the standard RSI 14 period. Secondly, a smoothing period of 2 is used vs. the customary 3 bars applied to Wilder’s RSI. Finally, the TDI applies the SMA as the basis for its calculation, not the EMA which is used for the standard RSI calculation. The core concept of the TDI indicator however, is applying the RSI in three (3) timeframes. The short timeframe, the TDI Price Line, has almost an identical output to Wilder’s RSI:

TDI Signal Line vs. RSI Average

In addition to the Price Line (short timeframe), the TDI indicator features a Signal Line (intermediate timeframe) and the Base Line (long timeframe). The Price Line indicates the short-term momentum and used together with the Signal Line crossovers it identifies potential entries. Finally, the Base Line is used to determine the overall direction and trend bias of the market.

The different TDI timeframes can be re-created by simply applying a standard RSI as input data for 3 separate SMA periods, using the modified settings (13,2) as follows:

  • TDI Price Line: RSI (13, 2)
  • Signal Line: RSI (13, 7)
  • Base Line: RSI (13, 34)
TDI SMA Smoothing

TDI Thresholds and Volatility

Another similarity to the RSI indicator, is the use of normalized thresholds to establish overbought and oversold scenarios. As opposed to the 70/30 thresholds used for the standard RSI, the TDI indicator thresholds are set to 68 for overbought and 32 for oversold. The thresholds can be used for exit management as well as to avoid setups that occur in over extended market conditions.

The TDI indicator also has a volatility measure, namely the Bollinger Bands. Contracting Bollinger Bands indicate a period of consolidation whereas expanding bands will show and increase in volatility. Therefore, when the Price Line moves outside the Bollinger Bands, it may indicate breakout scenarios as seen in the chart below.

Combined into one indicator, the TDI Base Line will then indicate a long/short bias when moving above/below the 50 threshold. A straightforward approach is to look for setups that align the Base Line trend bias, using the Price Line cross above/below the Signal Line as entry points.

TDI Signal Crossover Bollinger Breakout

The LizardIndicators Library TDI indicator also comes with an option for shading the Price, Signal and Base Lines once they move above or below the overbought / oversold thresholds. In the examples below we see a green shading as the Signal Line crosses the overbought/oversold thresholds. When the Signal Line and Base Line shading is activated, they will plot red and yellow respectively.

TDI overbought oversold thresholds

For the short scenario below, we first see the Base Line move below the 50 threshold indicating a down trend. Shortly thereafter, the Price Line crosses below the Signal Line for a short setup. Later the Signal Line also breaks outside the Bollinger Bands. Finally, this example shows that additional trade management rules (i.e. a trailing stop) should be in place for managing open profits.

Traders Dynamic Index setups and signals

The TDI indicator is available for NinjaTrader 8, to download, simply follow the below link:

Finally, the Traders Dynamic Index indicator is best used in combination with trend filters, support / resistance and volume indicators. For example, you review the Trend Filters and Trend Analysis categories. Specifically, you may review the ADX, the Adaptive Laguerre or the Heikin Ashi. For support / resistance levels you may review our Session Tools and Fibonacci lines, such as weekly retracement levels. You may also review our tools for Range and Volume Analyis, i.e. relative ranges / relative volume analysis.