TRIX Indicator

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21 Aug, 2024

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The Triple Exponential Average or TRIX Indicator refers to a momentum indicator that demonstrates the percentage change of a moving average smoothed thrice exponentially. Traders carrying out technical analysis utilize this tool to predict any potential trend reversal and analyze the momentum of a financial instrument’s price.

Since the smoothing of moving averages takes place three times, it filters out all price movements considered unimportant and insignificant. Besides using TRIX as another momentum indicator, one can use this oscillator to spot overbought and oversold markets. This tool offers timely signals, enabling traders to stay ahead of the trends in the market by focusing on the percentage change.

What Is TRIX Indicator?

TRIX indicator is a tool used in technical analysis that computes the difference in the rate of change between a couple of triple-smoothed EMAs in percentage. It determines overbought or oversold conditions with regard to a financial instrument.
Individuals can adjust the TRIX indicator setting to suit their style of trading and preferences.
One disadvantage of the TRIX indicator strategy is that it may give signals to traders after a trend in the market begins.
Individuals can keep an eye out for divergence and zero crossovers to determine their entry or exit points when using this indicator.

TRIX Indicator Explained

The triple exponential average indicator is an oscillator below and above the zero line, computing the percentage change in rate between a couple of exponential moving averages or EMA smoothed three times. It filters out insignificant price movements or noise in a financial instrument. Such a tool can help traders in financial markets spot reversals and trends in addition to potential trading opportunities.

Jack Hutson introduced this indicator in the 1980s. Over the years, this tool has become popular and utilized in technical analysis. It assists traders in identifying directional cues and diversions in trading patterns concerning financial instruments like stocks. Typically, it appears as a sub-chart below the actual or main chart. The placement enables an individual to reference TRIX values quickly while analyzing the main chart’s price movements.

The standard TRIX setting is 15 and 9 for triple-smoothed EMAs and the signal line, respectively. That said, note that one can alter the indicator settings according to their trading styles and preferences.

How To Use?

Using this indicator on any trading platform can help offer valuable insights into potential trading opportunities and market trends. One must first add this indicator to their trading platform to utilize it.

Adding to any popular platform, for example, TradingView, is a simple process that involves the following steps:

Open the platform and choose the desired asset or trading.
After clicking on the Indicators option available at the top of the chart window, search for TRIX and choose the indicator.
Adjust the indicator parameters per the trading preferences or utilize the default settings.
After configuration, select the apply button to add the momentum indicator to the chart.

Now, let us look at a few key pointers to trade using this tool.

Signal Line Crossovers: Any TRIX crossover below the zero line indicates a weakening impulse. If one spots this on a chart, they may consider selling the asset. On the other hand, a TRIX crossover above the zero line is an indication that the impulse is strengthening. Accordingly, individuals may consider buying the financial instrument.
Divergence: A divergence occurs if the direction of the indicator contradicts the security’s price action. In the case of a bullish divergence, i.e., when the indicator forms higher lows while the price of the asset forms lower lows, traders can consider placing a buy order. In contrast, when lower highs formation takes place concerning the indicator while the security’s price forms higher highs, it is an indication of a bearish divergence. Accordingly, traders may consider selling the financial instrument.

How To Calculate?

The calculation of this indicator involves the following steps:

Compute the single EMA: This involves calculating the closing prices’ 14-period EMA
Calculate the double EMA: This involves calculating the single EMA’s 14-period EMA
Compute the triple EMA: This involves calculating the double EMA’s 14-period EMA

Lastly, compute the TRIX line by using the formula below:

TRIX = (Triple Exponential Moving Average – Previous Triple Exponential Moving Average)/ Previous Triple Exponential Moving Average

The calculation of TRIX assists in determining the change in this indicator, offering insights into a financial instrument’s price momentum.

How To Read?

Since TRIX is an indicator that follows the trend, positive values imply that the financial instrument, for example, a stock, is in an uptrend. On the other hand, negative values imply that security is in a downtrend.

A positive value means that the TRIX value is above the zero line. Contrarily, a negative value means that the TRIX value is below the zero line. Note that TRIX values running along the zero line denote a neutral stance in the market. Also, remember that extreme positive TRIX values indicate oversold conditions, while extreme negative values mean oversold conditions in a financial market.

Source

As seen in the above chart from TradingView, when the price of Tesla stock was around the $103 mark on January 6, 2023, the extremely negative TRIX value indicated oversold conditions. Individuals who bought the stock around that level could make significant profits over a short period. Note that the blue line is the TRIX indicator, and the horizontal white dotted straight line is the zero line.

That said, when the stock price was around the $200 mark on July 19, 2023, the extreme positive TRIX value indicated overbought conditions. This meant that it was the right time for traders to offload Tesla shares.

Examples

Let us look at a few TRIX indicator examples to understand the concept better.

Example #1

Suppose ABC stock was on the watchlist of a trader named Sam. He was looking for an ideal entry point so that he could make short-term financial gains. He used the TRIX indicator and found that around the price of $10 per share, the TRIX value went above the zero point line. Predicting that stock price would rise, observing the crossover, Sam purchased 100 shares. Within a month, the stock price jumped to $20. So, Sam sold all the shares and made financial gains worth $1,000.

Example #2

Suppose David is an experienced trader who has XYZ stock in his portfolio for the past 6 months. He uses the TRIX indicator and finds out an extreme positive TRIX value. In other words, the TRIX line is way above the zero point line, signifying an overbought condition. Predicting a trend reversal, he sells the XYZ shares in his portfolio. His decision turned out to be correct, as the stock price dropped significantly.

Advantages And Disadvantages

Let us look at the benefits and limitations of the TRIX indicator.

Advantages

It ensures excellent filtration of market noise, thus removing the small short-term cycles indicating an alteration in market direction.
A key TRIX indicator benefit is that it can help traders detect trend reversals early. It is quite popular among technical analysts for this reason.

Disadvantages

Similar to any other indicator, this tool is not free from false signals.
The TRIX indicator strategy may provide signals following the start of the trend because of its inherent lag.
In volatile markets, market noise can influence TRIX signals, resulting in less dependable readings.

Frequently Asked Questions (FAQs)

Is the TRIX indicator good?

Yes, it can be effective, especially if one utilizes the tool with one more market-timing indicator. This is because the combination can minimize false signals. That said, note that this indicator comprises moving averages. This is why it may provide late signals.

What is the difference between MACD and TRIX indicators?

Both MACD and TRIX indicators have a lot of similarities. However, a key difference between them is that the latter offers smoother outputs owing to the utilization of triple-smoothed EMAs for its creation.

What timeframe can traders use for the TRIX indicator?

Traders can apply this indicator to various timeframes, including weekly, daily, monthly, or intraday charts. The choice of timeframe will depend on a trader’s preference and trading style.

Which financial instruments can be traded using TRIX?

Individuals can utilize this technical analysis indicator to trade different financial assets, such as exchange-traded funds, stocks, cryptocurrencies, currency pairs, and commodities.