How The Triple Exponential Moving Average (TRIX) Indicator Works

0
104

In some of our recent blog posts, we have discussed how moving averages are commonly used by technical analysts and traders to analyze stock prices and other securities.

Moving averages are important because they smooth out price fluctuations to help traders distinguish between market noise and the downtrend.

In this post, we will look at an oscillating momentum and a trend indicator called the Triple Exponential Moving Average, or TRIX.

What is TRIX?

The Triple Exponential Moving Average is a powerful technical analysis tool that experienced and novice traders use to determine price momentum and identify overbought / oversold conditions in a given stock.

TRIX was developed in the 1980s by Jack Hutson, the editor of a magazine called “Technical Analysis of Stocks and Commodities.”

As its name implies, TRIX shows the percentage change between two triple smoothed exponential moving averages. In other words, TRIX is a percentage change from EMA to EMA from EMA. A signal line, which is another EMA, can also be applied to the result.

The role of this indicator is to filter out “noise” or insignificant movements in stock prices as is the case with the indicator of moving average convergent divergence (MACD).

This indicator combines momentum with trend. While it identifies the overbought and oversold shares on the stock exchange, TRIX also identifies bullish and bearish divergences.

The chart below shows the indicator applied on the chart of a 9-day E-mini S&P 500 Futures contract.

TRIX

How to calculate TRIX

As mentioned above, the triple exponential moving average indicator is basically EMA, from EMA, from EMA, and that’s why it has the word “triple”.

Unlike simple moving averages, which calculate the average price, putting equal weight on all price data, exponential moving averages normally put more weight on current price.

To calculate TRIX, you must first select a period with which to create an exponential moving average of the closing prices. For example, if you want to calculate TRIX for a 14-day period, here are the steps you need to follow:

  • Calculate the 14-day EMA of the closing price
  • Calculate the 14-day EMA of the MA calculated in step # 1
  • Calculate the 14-day EMA of the MA calculated in step # 2
  • Finally, calculate the 1-day percentage change from the MA calculated in step # 3

The calculation above will compute a TRIX indicator that oscillates above and below the zero line, generating positive and negative values.

As traders use TRIX indicator

The TRIX indicator basically generates the following three interpretations, all of which look very similar to those generated by the MACD:

  • Null line intersections
  • Signal line intersections
  • Bullish and bearish divergences

Null Line Crossings

As the TRIX indicator swings around a zero line, it creates a zero line cross signal that can help determine the momentum of the market.

A bullish crossover occurs when the TRIX indicator crosses over its signal line. On the other hand, a bearish crossover occurs when the indicator crosses down over its signal line. The crossovers usually indicate a trend reversal.

When the TRIX crosses the null line from bottom to top, it becomes positive. This indicates that the trend has become bullish. Therefore, retailers can look for opportunities to place purchase orders in the market.

When the TRIX breaks the null line in a downward direction, it becomes negative. This indicates that the trend has become bearish and traders can therefore look for opportunities to place sales orders in the market.

Signal Line Crossovers

A trader should also add a signal line on the TRIX indicator to select the best entry points. The signal line is a moving average of the TRIX indicator, and therefore lags behind the indicator.

A bullish signal occurs when the indicator crosses the signal line from below. On the other hand, a bearish occurs when the indicator crosses the signal line from above. Traders can apply this method in both diverse and trending markets.

In a broad market, a signal line crossing indicates that resistance and support areas have been supported in the market. In a trend market, a signal line crossing confirms the end of the price rebound and the resumption of the main trend.

Bullish and bearish divergences

The TRIX indicator can also come in if you want to identify when major turning points will occur in the market. You can achieve this by looking at divergences that occur when the stock price moves in the opposite direction as the indicator.

A bullish divergence occurs when the TRIX makes a higher low while the price of the underlying stock falls. When this happens, it implies that a bullish price reversal is about to take place and the downside is losing momentum.

Bear divergence occurs when the TRIX makes a lower high and the price of the underlying stock becomes higher. This implies that a bearish price reversal will occur and the uptrend will lose momentum or weaken.

Bullish and bearish divergences form when the stock price and the indicator do not confirm themselves.

Bottom Line

Traders use the TRIX indicator to determine overbought and oversold stocks and other securities. They can also use it as a moment indicator.

Like most oscillators, TRIX oscillates around a zero line. Divergences between TRIX and price can also mean huge turning points in the market.

TRIX shows the percentage change of a triple exponentially smoothed moving average of the closing stock price.

The indicator is commonly used to filter prices that are considered insignificant or insignificant. Additionally, it can be used to predict turning points in a trend by diverging with the stock price.

Remember that TRIX generates more accurate (but less) signals when used in higher time frames. In shorter time frames, the indicator tends to give false signals.

When combined with other technical analysis or fundamental analysis tools, TRIX can help traders get accurate signals.

Source

LEAVE A REPLY

Please enter your comment!
Please enter your name here