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TRIX Indicator Explained: Enhance Your Trading with Triple Exponential Averages

Introduction

The Triple Exponential Average (TRIX) is a momentum indicator used by technical traders to show the percentage change in a triple exponentially smoothed moving average. Developed by Jack Hutson in the early 1980s, the TRIX Indicator aims to eliminate noise from price movements, making it easier to identify the prevailing trend. Similar to the Moving Average Convergence Divergence (MACD), TRIX generates trading signals.

TRIX Indicator

Principles of TRIX

Triple Exponential Moving Average (TEMA)

The Triple Exponential Moving Average (TEMA) is a critical component of the TRIX indicator. TEMA is a type of moving average that places a greater weight on recent price data by applying exponential smoothing three times. This approach reduces lag and makes TEMA more responsive to price changes.

Percentage Change

The TRIX indicator measures the percentage change in TEMA, which helps traders identify trend reversals and potential trading opportunities. By focusing on the rate of change, TRIX can filter out small price fluctuations and highlight significant trend changes.

TRIX Calculation

To calculate the TRIX indicator, follow these steps:

Step 1: Calculate EMA

Calculate the n-period Exponential Moving Average (EMA) of the closing prices using the following formula:

EMA = (Closing Price - Previous EMA) * (2 / (n + 1)) + Previous EMA

Typically, n is set to 14, but traders can adjust the value based on their preferences.

Step 2: Calculate TEMA

Calculate the n-period Triple Exponential Moving Average (TEMA) using the EMA values obtained in Step 1. First, compute the double EMA (DEMA) and then the TEMA with these formulas:

DEMA = 2 * EMA - EMA of EMA

TEMA = 3 * EMA - 3 * DEMA + EMA of EMA of EMA

Step 3: Calculate TRIX

Compute the percentage change between the current TEMA and the previous TEMA value using this formula:

TRIX = (Current TEMA - Previous TEMA) / Previous TEMA * 100

The resulting value is the TRIX indicator.

Example scanners and strategies that use TRIX Indicator

The Triple Exponential Average can be used in both Scanning the market and Testing Strategies. To see how exactly it can be used in these ways, we provide the following samples. The scanner searches the market for stocks using this indicator, and the strategy tests buying and selling rules built around this indicator.

"TRIX Bullish" scanner by ILuvMarkets
charts.trendspider.com
“TRIX Bullish” scanner by ILuvMarkets
"TRIX Bullish" strategy by ILuvMarkets
charts.trendspider.com
“TRIX Bullish” strategy by ILuvMarkets

TRIX Signals

Bullish Signals

A positive TRIX value indicates upward momentum, and a crossover of the TRIX line above a signal line (usually a 9-day EMA of TRIX) is considered a bullish signal.

Bearish Signals

A negative TRIX value suggests downward momentum, and a crossover of the TRIX line below the signal line is seen as bearish.

Divergence

Divergences between the TRIX indicator and price can provide valuable insights into potential trend reversals. For example, a bullish divergence occurs when the price makes lower lows, but TRIX forms higher lows, suggesting a possible trend reversal to the upside.

Practical Applications

Trading Strategies

Various trading strategies incorporate the TRIX indicator:

  1. Crossover Strategy: Buy when the TRIX line crosses above the signal line, and sell when the TRIX line crosses below the signal line.
  2. Divergence Strategy: Identify potential trend reversals by looking for divergences between the TRIX indicator and price action.
  3. Zero Line Strategy: Buy when the TRIX line moves above zero, indicating positive momentum, and sell when it moves below zero, indicating negative momentum.

These strategies can be combined with other technical analysis tools, such as support and resistance levels or chart patterns, to enhance their effectiveness.

Limitations

Despite its usefulness, the TRIX indicator has some limitations:

  1. Lagging Indicator: Like all moving averages, TRIX is a lagging indicator, which means that it may not provide timely signals.
  2. False Signals: TRIX can generate false signals, especially in sideways or range-bound markets.
  3. Subjectivity: The choice of the period (n) and the signal line settings can influence the effectiveness of the TRIX indicator, making it somewhat subjective.

Traders should be aware of these limitations and use the TRIX indicator in conjunction with other technical analysis tools to improve decision-making.

The Bottom Line

The TRIX indicator, developed by Jack Hutson, is a valuable tool for technical traders to identify trend changes and generate trading signals. By focusing on the percentage change in a triple exponentially smoothed moving average, TRIX helps filter out the noise and highlight significant price movements. When used alongside other indicators, such as MACD, TRIX can provide a more comprehensive understanding of market dynamics and potential trading opportunities. However, traders should be aware of its limitations and use it as part of a broader trading strategy to mitigate risks and improve overall performance.

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