What is TRIX & how it helps in preventing traders from being tricked?
It’s a play on words (Tri from triple and X from the exponential moving average). It’s not a tribute to the TRIX cereal pack featured on the blog home page but the image was too attractive not to be put up!
The TRIX indicator was developed by Jack Hutson in the early 1980’s.
It is basically a momentum oscillator and displays the percent rate of change of a triple exponentially smoothed moving average. A triple smoothed EMA means an EMA of an EMA of an EMA!
The TRIX is a simple indicator that helps smooth out price fluctuations and shows the direction of dominant momentum (or lack of it) in a stock or index.
Stock market participants may often be confused when sudden jumps take place in stocks or indices- about what the subsequent action could be. In the heat of the moment, positions are entered too late just for us to repent later – when the smart money moves out in droves and we are left holding the proverbial baby.
For those who are technically inclined – for short or medium term time frames – with so many technical indicators vying for attention, which one does one trust?
The writer of this blog has found the TRIX indicator helpful in confirming trends and spot potential price reversals. The absolute simplicity of the indicator along with the ready availability on charting platforms makes it a sensible single indicator to use along with any of your favorite rules.
The TRIX indicator smooths price data and then looks at the daily (or whatever time frame is being used) percentage movement of that smoothed price data. This filters out much of the price noise that’s seen on the price chart.
CALCULATING TRIX
It is a four step process to calculate TRIX. The indicator is “triple smoothed,” which means we are taking a moving average of a moving average of a moving average.
- 15-period exponential moving average (EMA) using closing prices.
- 15-period EMA of result from step 1.
- 15-period EMA of result from step 2.
- 1-period percent change of step 3.
Step 4 is the TRIX, which will fluctuate from period to period.
A different number of periods could be used in the calculation. Increasing the number of periods, for example to 40, will decrease the sensitivity while Decreasing the number of periods, for example to 10, will increase the sensitivity of the indicator for very short-term traders .
As an additional step, we can also calculate a moving average of the TRIX indicator to provide crossover trade signals. For example, if using a 15-period TRIX, a 9-period moving average could be applied to it.
USING TRIX
a) TRIX and Crossovers
Bullish: Whenever TRIX crosses above the 0 line and the price seems to be reversing to an uptrend by forming either trendline breaks or higher highs and higher lows, it points to an upcoming bullish move.
Bearish: Whenever the TRIX indicator crosses below the 0 line and the price seems to be reversing to a downtrend by forming either trend line breaks or lower highs and lower lows, it points to an upcoming bearish move.
b) TRIX and Divergences
The divergence between price and the TRIX indicator can be used for identifying upcoming bullish or bearish moves
Bullish Divergence: Whenever the TRIX indicator forms higher lows and the price forms lower lows, a bullish divergence is formed. Usually, the price surges up after the bullish divergence.
Bearish Divergence: Whenever the TRIX indicator forms lower highs and the price forms higher highs, a bearish divergence is formed.
The way its designed, the TRIX will rise on sustained moves higher in price, and will fall on sustained moves lower in price.
ILLUSTRATION
We have applied a simple 10 day TRIX calculation (below- red dashed line indicates the signal line for crossovers). See the TRIX reversing followed by sharp market moves.
LIMITATION
Since TRIX is smoothed (see calculation below) it takes time to react to changes in price direction.
At times, this can be beneficial, because not every little pullback means a trade should be exited or that the trend is going to reverse.
The TRIX doesn’t always reflect what is happening in the stock price. The price may be trending higher while TRIX is trending lower.
This is a divergence which signals a potential end to the trend, but a trend can persist for a very long time even on weakening momentum. .
False crossovers are another common issue. A false crossover is when the TRIX crosses above or below the zero line, only to snap back the other way, resulting in a losing trade.
It is therefore ideal that one more (MACD is almost similar so shouldn’t be used) indicator be used alongside TRIX to generate probable signals and reduce errors.
Finally, there are many custom settings for the TRIX such as 30 periods and 15 periods. You should make sure the TRIX setting you are using fits with the trading strategy you are following.
Read more about the indicator at https://en.wikipedia.org/wiki/Trix_(technical_analysis)