What Is The TDI Indicator & How To Trade With It

TDI Indicator Explained

The Traders Dynamic Index (TDI) is a versatile trading indicator that is based on a combination of technical analysis. The TDI indicator implements the standard RSI indicator, which determines the strength of the current trend, or if you want, the rate of change in price. The moving averages algorithm is used to smooth the lines, and Bollinger bands are used to estimate the amplitude of the oscillations. Thanks to an integrated approach, the TDI indicator alone can be used as a complete trading system.

What is the TDI indicator?

The green line is a smooth RSI line with a small period. Red has a longer smoothing period and is called a signal. RSI is not used in its pure form; its values ​​are used only for calculating the fast and signal lines. Bollinger lines are also plotted based on RSI readings, but not smoothed values. The yellow line is the average between the upper and lower lines of the channel. 3 of these lines reflect market strength and current volatility.

TDI indicator on chart
TDI indicator on chart

TDI indicator parameters

  • Period for calculating the RSI indicator. A value between 8 and 25 is often used whilst the optimum period is 13.
  • Selection of the initial price for the Relative Strength Index. By default, the closing price is used.
  • A period of standard deviation is used to calculate the boundaries of volatility (Bollinger Bands). The lower the value, the lines are more sensitive to changes.
  • Smoothing the RSI fast line.
  • The way to smooth. By default, a simple average.
  • The smoothing period of the RSI slow line.
  • The way to smooth the line.
TDI indicator parameters
TDI indicator parameters

How to use the TDI indicator?

The TDI indicator simultaneously shows the direction and strength of the current trend, by which we can try to determine the right moment to enter trade positions. Despite the complex nature, understanding the operation of the indicator is quite simple – you need to determine the signals and understand what they mean.

TDI indicator trend direction

First of all, the indicator can be used to determine the current trend. The green line above the red signals a change in the short-term trend to an uptrend. When green falls below red, the short-term trend changes to a downtrend.

The yellow line shows a long-term trend. Mostly, it does not go beyond 68 and 32. When the line pushes off from these borders, it signals a possible change in trend.

TDI indicator trend direction
TDI indicator trend direction

TDI indicator market strength & volatility

The indicator also signals the current market strength. Usually, the greater the slope of the green line, the stronger the market players. If the line moves more horizontally than vertically, we may be dealing with an extremely inert market that is ranging. This could be beneficial for those who are using range trading strategies.

The expansion of the Bollinger bands signals an increase in volatility. The narrowing of the lines, on the contrary, indicates a decrease in volatility and a weakening market. With a strong narrowing of the lines, one may expect the release of any important reports or other news that can dramatically move the market. In such cases, it may be better to refrain from trading unless you are implementing a news trading strategy.

TDI indicator market strength
TDI indicator market strength

TDI indicator trading signals

One way to get trading signals from the TDI indicator is to open a buy deal when the green line crosses the red line in the direction of the uptrend. Similarly, you may open a deal to sell when the green line is below the red. For more conservative traders, a buy position could be entered when both lines are above the yellow. Accordingly, in the case of a sale, the green and red lines could be below the yellow line.

TDI indicator trading signals
TDI indicator trading signals

There is also a variation of the strategy for forex swing trading positions with a transaction holding time from several days to several weeks. The rules are the same as for the conservative strategy, with the exception that all three lines should be above level 50 in case of purchase and lower – in case of sale. Ideally, Bollinger bands should indicate an increase in volatility; that is, the lines should diverge.

TDI indicator trading strategy

In addition to the TDI indicator itself, we can use Heiken Ashi from the Ichimoku Kinko Hyo.

Entering a buy position is when the green line crosses the red line from the bottom up during the first two candles of Heiken Ashi. The same thing, just the opposite for a sell trade. That is, both indicators should show a change in trend at about the same time.

It may be worth leaving the deal when the green line begins to bend or shows signs of a reversal, becoming horizontal. Stop-loss can be set at a recent level of support or resistance.

TDI indicator - buy & sell setup
TDI indicator – buy & sell setup

TDI indicator conclusion

The TDI indicator is a 3-in-1 indicator that can anticipate trend direction, momentum and market volatility. The TDI indicator can be sensitive to the current market environment and be implemented into short, mid and long term trading strategies.

I would prefer to use the majority of technical indicators such as the TDI indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The TDI indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the TDI indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the TDI indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!