Motivated by an article on Bollinger Bands, the Tension Indicator was developed in 1998 as an alternative trend indicator. An 8 period weighted moving average of the Tension Indicator – a ‘signal’ line – is then plotted on top of the Tension Indicator, acting as a generator for buy and sell signals.
There are several methods to interpret the Tension Indicator:
As a Simple Visual Confirmation of the Trend
- A rising Tension Indicator suggests a rising/bullish trend
- A falling Tension Indicator suggests a falling/bearish trend
- A flat Tension Indicator suggests a consolidating/neutral trend
The Tension Indicator has been rising steadily since May, indicating a bullish trend.
As a Trading System
- When the Tension Indicator crosses above the signal line, it highlights the possible start of a bullish trend, and generates a buy signal.
- When the Tension Indicator crosses below the signal line, it highlights the possible start of a bearish trend, and generates a sell signal.
A buy signal was generated at 21.39 on 15 May. This has developed into a significant rally, with prices now trading over 100 points higher.
As a Signal of a Trend Change
- When the Tension Indicator diverges from the security price, it signals the possible end of the current trend.
Prices made new highs in May-July 2013, but the Tension Indicator failed to follow suit. This negative divergence is an indication of a trend change which, in this particular case, was followed by a significant fall for the next 4 months.
- The Tension Indicator works equally well on all time frames – from intraday tick charts through to multi-month charts.