There are the various parts of the TFI Indicators, the color of the candle, the color of the trend, the oscillator, the arrows, and the overbought/oversold dots and diamonds.
None of these indicators are meant to be used as a “stand alone” indicator to generate a signal. For a low risk signal you need to see multiple indicators “come together”, AND it is best to have multiple time frames showing the same type of basis.
We need to examine each one individually and then we can bring start to bring them together. Also, one thing I recommend for new members that are not familiar with the TFI Charts, is that it is a good exercise to start by watching just the 8min chart in real time for a few days. Do not trade on it, do not watch the news or other charts, just this one time frame as it cycles up and down and pay attention to how the strength and weakness ebbs and flows. Also observe the interactions as the oscillator crosses thru the price and the dots/diamonds and arrows appear on the chart.
The reason I recommend watching this intraday time frame, is that even for those that do not day trade, this chart will make many up and down cycles which gives you the opportunity to quickly become familiar with how the TFI Charts work.
First we will look at is the colors of the candles and how the colors change as the price goes thru the different up and down cycles.
On the left side of the chart, notice how the candles change from red to the first green one. The second green candle shows the price opening and closing just above the close of the first green candle. This is a “confirmation” in the color as it is showing that the strength is starting to move the price higher. From this “base” an upward move develops, and continues until we start to see some yellow candles.
In this example, we can see how the candles “lost” their strength as they turned from green to yellow, and then even though the price set a new high, the candle was only blue. This was followed by 2 yellow candles and then a strong decline in the price with the red candles.
The 3rd example shows how the candles were blue, dropped to a new low, but only on a yellow candle. From this low the candles turned back to blue, and this gave way to green as the upward move developed.
These examples illustrate how the green and red candles develop and show the potential for a move in the price. The yellow and blue candles are lacking in strength or weakness, and quite often will show when a move is coming to an end.
On these two charts we can see how the candles changed colors as the up and down moves developed. We can also see occasions where the candles started to change color, but then resumed the move. This is why the color of the candle is just one part of the overall system and not a stand alone indicator.
The candles are not the only indicator that shows strength or weakness. We also have the “trend” bar that is shown below the price. For this next chart I set the chart to hide the colors of the candles just to show how the trend can show strength when it is green, and weakness when it turns red.
It is when we have the candles and the trend both showing strength or weakness that we begin to see better prospects for the price to move in a particular direction.
The arrows represent the POTENTIAL for a new move to develop. Many times they will appear as the price is changing from one direction to another as shown on this chart.
However, there are times when the price will not live up to that potential. This is why the arrows are used in conjunction with the other TFI Indicators.
The next item we want to examine is the Oscillator. Once again I have “hidden” the candle colors just to show how the price reacts when the Oscillator crosses up or down thru it.
The Oscillator is best used as a “warning” indicator. When the Oscillator crosses through the price it is a warning that the current directional move could come to an end very soon.
There are some occasions where a strong move will develop and the price will “chase” after the oscillator. This is why the oscillator is not a stand alone signal, but instead a “warning”.
The dots represent overbought & oversold conditions, with the diamonds showing that those conditions have reached extreme level.
Many times these conditions will appear at the end of a move and are a “warning” that a change is coming in the near future. However, there are times when the price will continue with the move and remain overbought or oversold, so like the oscillator this is a “warning” type of indicator.
From years of study, research and experimentation I found that there is not any one indicator that can be used as a system by itself. This is why I developed these indicators, to boil technical analysis down to as few indicators as possible.
These indicators show when there is strength or weakness in the price, and also whether there is strength or weakness in the trend. This helps us to determine if there is accumulation or distribution taking place, and when a directional move is developing or is underway.
I developed the arrows to highlight key points when there is a potential for a new move to develop. To help get ready for that move if the other indicators begin to align in that direction.
The oscillator and the overbought/oversold indicators help to give us warnings when a move is becoming over extended. This gives us clues and warnings that the prospects are increasing for the move to end, and possibly for a reversal to develop.
There are times when a move is coming to an end that we can use that information to sell option premium. There are other times when a move is just starting to develop that we can enter a directional trade, whether it is an intraday day trade, or a multi-day swing trade.
The lessons learned from one chart can be applied to all of the other time frames, which is why watching the intraday chart move thru the up and down cycles allows you to see the different ways that these indicators interact.
In the next article we will look at some of the intraday time frames, and how multiple time frames can be used to identify a low risk trading opportunity.