Introduction to the TDI Indicator
The TDI Indicator is a trend and momentum indicator which was developed to help traders identify potential trend reversals even before price action fully reverses. Traders can use this as a tool to objectively identify and confirm such reversals in confluence with price action signals.
What is the TDI Indicator?
The TDI Indicator is a custom technical indicator which plots a pair of oscillator lines and histogram bars.
The green line is the Direction Line, while the red line is called the TD Index. These two lines work together to indicate the direction of the trend. The TD Index line serves as a signal line to the Direction Line. The trend is bullish whenever the Direction Line is above the TD Index line and bearish whenever the Direction Line is below the TD Index line.
The histogram bars are called the Signal. It shifts up to confirm a bullish trend reversal and down to confirm a bearish trend reversal.
How the TDI Indicator Works?
The TDI Indicator has a complex formula and algorithm which uses underlying Exponential Moving Average (EMA), Simple Moving Average (SMA), and Smoothed Moving Average (SMMA) lines to arrive at its trend direction indications and signals. It plots its Direction Line, TD Index line, and Signals based on this complex algorithm.
How to use the TDI Indicator for MT5
The TDI Indicator has a couple of settings options which traders could tweak.
The “Period” variable allows traders to modify the number of periods or candles used by the indicator to compute for its trend direction indications.
“Applied Price” refers to the point on a price candle where the price data would be sourced, whether the Close, Open, High, Low, Median Price, Typical Price, or Weighted Price.
The TDI Indicator can be used as a trend reversal signal indicator. However, the signals it produces should point in one direction before opening a trade. This includes the Direction Line and TD Index line crossover, as well as the Signal bars shifts.
Buy Trade Setup
When to Enter?
The Signal bars should shift above zero. Open a buy order on the confluence of the crossing of the Direction Line above the TD Index line and the development of a bullish momentum candle or price action. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as the Direction Line crosses below the TD Index line.
Sell Trade Setup
When to Enter?
The Signal bars should shift below zero. Open a sell order on the confluence of the crossing of the Direction Line below the TD Index line and the development of a bearish momentum candle or price action. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as the Direction Line crosses above the TD Index line.
Conclusion
The TDI Indicator is a decent trend reversal indicator. At first glance it would seem that the histogram bars do not conform to the direction of the trend. However, the Signal bars are merely just a filter and an added confluence to the Direction Line and TD Index line.
The signals produced should also be traded in confluence with a momentum shift based on price action and candlestick formations.
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