What is a Trix Indicator in Trading?

Are you new to trading and struggling to identify the price trend of an asset? Many beginners feel overwhelmed when analysing a price trend and cannot avoid false signals.

However, a Triple Exponential Moving Average, TRIX indicator, is a trend-following tool that can help you avoid market noise. Read this blog to understand the TRIX indicator meaning, calculation, and its interpretation.

What is the TRIX Indicator?

The Triple Exponential Average, TRIX indicator, is a technical analysis tool which helps you identify price trends, potential reversals, and trading opportunities in different financial markets.

This indicator focuses only on the rate of change of a triple exponential moving average (EMA). The TRIX indicator depends on smoothing price data to filter out market noise and focus on significant price trends. Highlighting the rate of change, this unique indicator also provides you with timely signals to help you stay ahead in market trends.

Moreover, it highlights how fast or slow prices change. Due to its smoothing nature, you do not get distracted by unimportant fluctuations.

How Does a Trix Indicator Work?

The TRIX indicator functions in these three main steps:

1. Calculate the short-term EMA of the price data.
2. Calculate the rate of change of the short-term EMA.
3. Calculate the EMA of the ROC, which you have calculated in the previous step.

You can get the TRIX line from the final step, which represents the triple EMA of the rate of change. After that, the TRIX line can produce trading signals and find out potential price trends.

Calculation of Trix Indicator

You can calculate the TRIX indicator by using the formula shown below. Here is the step-by-step process of the calculation:

1. Determine the single EMA, which is the 14-period EMA of the closing prices.
2. Find out the double EMA by calculating a 14-period EMA of a single EMA, which you have calculated in the first step.
3. Now, calculate the triple EMA by evaluating a 14-period EMA of the double EMA, which you have calculated in step 2.
4. Then, calculate the TRIX Line by using this formula:

TRIX = (triple EMA – previous triple EMA) / previous triple EMA

The outcome shows the triple EMA of the rate of change, which can be included on a chart to visually evaluate trends and buy or sell signals.

Interpretation of the TRIX Indicator

You can see the TRIX indicator as a line oscillating above and below zero. Here is how you can interpret it:

1. Above Zero Line or Positive TRIX

   This shows an uptrend of prices, where the momentum is positive, and bulls are dominating.

2. Below Zero Line or Negative TRIX

   This is a downtrend, which shows the momentum is negative and the trend is bearish.

3. Signal Line Crossovers

   A signal line is a simple moving average (SMA) of the TRIX line. A bullish crossover refers to a buying signal, where the TRIX line is crossing above the signal line. On the other hand, a bearish crossover means a selling signal, where the TRIX line is crossing below the signal line.

How to Trade Using Trix Signals?

There are a lot of popular trading strategies you can use with the TRIX indicator. Some of them are:

1. Signal Line Crossover

   The signal line crossover strategy involves adding a signal line to the TRIX indicator. This helps you choose optimal entry points. This signal line is a moving average of the TRIX indicator, which will always lag behind the TRIX.

   You can find a signal to place a buy order when the TRIX line crosses the signal line from below. Similarly, you can find a signal to place a sell order when the TRIX crosses the signal line from above.

2. Divergence

   You can also look for divergences between price movements and the TRIX line. With this strategy, you can get signals for potential reversals or changes in trends. You can see that the momentum is weakening to the downside, which suggests buyers will soon regain control.

3. Zero Line Crossover

   A TRIX indicator can help you find out the ‘impulse’ of the market. Keeping 0 as a centreline, if it crosses from below, it will indicate that the impulse is growing in the market, and you can find opportunities to place buy orders. Similarly, a cross of the centreline from above will indicate a shrinking impulse in the market, and you can find opportunities to place sell orders.

4. Volume

   Volume indicators, such as on-balance volume (OBV), can confirm your TRIX signals. In a buy setup, a TRIX indicator provides a bullish crossover, where OBV is rising. In a sell setup, the TRIX provides a bearish crossover, where the OBV is falling.

Benefits of Using Trix Indicator

1. Noise Filtration

   The triple smoothing function filters out unnecessary signals caused by tiny price movements.

2. Momentum Detection

   A TRIX indicator also allows you to identify changes in momentum, which is beneficial for short-term traders.

3. Combination With Other Indicators

   To get more accurate indications, you can use it with volume indicators or the Relative Strength Index (RSI).

4. Follows Trend

   This indicator is beneficial for spotting and riding strong trends.

Limitations of Using Trix Indicator

1. Lagging Indicator

   Since the TRIX indicator depends on smoothing techniques, it can provide late signals or may respond late to sudden price changes.

2. Market Noise

   Another limitation of this indicator is that it is affected by market noise in volatile markets. This can lead to less reliable readings.

3. False Signals

   A TRIX indicator functions best in trending markets. In sideways or low-volatility sideways conditions, this indicator may provide misleading signals.

Final Thought

A TRIX indicator is an appropriate tool for you if you want to avoid unnecessary market noise and stay right on track while trading. This simple indicator helps you to find momentum and identify trends. However, to get better results, you must combine it with other indicators.

To know more about trading signals and technical analysis, download the PL Capital Group – Prabhudas Lilladher application and open a Demat account for free. PL offers you the best platform for trading and data-driven market insights.

Frequently Asked Questions

1. Which settings are appropriate for the TRIX Indicator?

The default period of a TRIX indicator is 15. However, you can modify it based on your trading style. While shorter periods are more reactive, longer periods are smoother.

2. What is the formula for calculating the TRIX Indicator?

The formula for calculating the TRIX indicator is TRIX = (triple EMA – previous triple EMA) / previous triple EMA. Before this, you have to determine the single EMA, the double EMA, and the triple EMA.

3. How can traders utilise the TRIX Indicator?

Traders can utilise a TRIX indicator by using the divergence strategy, zero-line crossover strategy, signal line crossover strategy, and volume strategy.

4. Is the TRIX Indicator appropriate for every market?

No, a TRIX indicator is not appropriate for every market condition. You can effectively use it in trending markets, but it can tend to generate false signals in range-bound or sideways markets.