The triple exponential average (TRIX) is a unique indicator that combines trend and momentum. It is useful for filtering insignificant price movements and confirming trends, identifying oversold and overbought markets, identifying trend reversals etc. Let’s learn how.
What is TRIX indicator?
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 smoothened EMA means an EMA of an EMA of an EMA.
In short, TRIX is the 1-period percentage rate-of-change for a triple smoothed exponential moving average (EMA). Thanks to the triple smoothing, volatility is reduced, thereby minimizing the chance of false signals that would make you exit out of a trend too early.
TRIX usually rises when there is sustained moves higher in price, and falls when there is sustained moves lower in price. The figure below shows a TRIX indicator.
TRIX and Crossovers
The crossovers in the TRIX indicator can be used for identifying upcoming bullish or bearish moves
- Bullish: Whenever the TRIX indicator 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 trendline breaks or lower highs and lower lows, it points to an upcoming bearish move.
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.
TRIX and Chart Patterns
The movement of the TRIX indicator can develop into popular chart formations. For instance, formations like Inverted Head and Shoulders pattern, Falling Wedge Pattern, Flag pattern etc. points to an upcoming bullish move. Similarly, Rising Wedge Pattern, Head and Shoulders Pattern, Inverted Flag etc. points to an upcoming bearish move. Many other patterns like the diamond pattern and triangles point to an upcoming bearish or bullish move.
TRIX, Momentum, and Oversold/Overbought Market
TRIX can be used to identify an overbought or oversold market.
- When the value of TRIX is positive, it indicates an overbought condition
- When the value of TRIX is negative, it indicates an oversold condition
The TRIX also can be used as a momentum indicator.
- A positive value of TRIX usually suggests that the momentum is increasing
- A negative value of TRIX usually suggests that the momentum is decreasing.
How Traders Use TRIX Indicator
Following are the trading signals used by traders
Bullish Signals
- Go long when TRIX turns up below zero.
- Go long on bullish divergences.
Bearish Signals
- Go short when TRIX turns down above zero.
- Go short on bearish divergences.
Note: Sometimes, traders use a signal line to eliminate false signals. This signal line is basically a 9-day exponential moving average of TRIX. Then, traders enter the trade only after TRIX crosses the signal line.
Traders also use TRIX indicator in combination with other technical indicators in order to confirm entry and exit points.
The figure below shows how TRIX can be used for entering and exiting trades
Happy Trading!
Tara
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