In some of our recent blog posts, we have discussed how moving averages are frequently used by technical analysts and traders to analyze the prices of stocks and other securities.
Moving averages are important because they smooth out price fluctuations to help traders distinguish between market noise and the underlying trend.
In this post, we will look at an oscillating momentum and trend indicator called the Triple Exponential Moving Average, or TRIX.
What is TRIX?
The Triple Exponential Moving Average is a strong technical analysis tool that experienced and novice traders use to determine the momentum of a price 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 & Commodities.”
As its name implies, TRIX shows the percentage rate of change between two triple smoothed exponential moving averages. In other words, TRIX is a percentage rate of change of an EMA of an EMA of an 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 moving average convergence divergence (MACD) indicator.
This indicator combines momentum with trend. While identifying the overbought and oversold stocks in the stock market, 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.
How to calculate TRIX
As mentioned above, the triple exponential moving average indicator is essentially an EMA, of an EMA, of an EMA, and that’s why it has the word “triple.”
Unlike simple moving averages that calculate the average of prices while placing equal weighting to all price data, exponential moving averages normally put more weight on current price.
To calculate TRIX, you must first choose 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, these 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 percent change of the MA calculated in step #3
The calculation above will compute a TRIX indicator that oscillates above and below a zero line, generating positive and negative values.
How traders use TRIX indicator
The TRIX indicator essentially generates the following three interpretations, all of which look very similar to those generated by the MACD:
- Zero line crossovers
- Signal line crossovers
- Bullish and bearish divergences
Zero-Line Crossovers
As the TRIX indicator swings around a zero-line, it creates a zero-line crossover signal that can help determine the impulse of the market.
A bullish crossover happens when the TRIX indicator crosses up over its signal line. On the other hand, a bearish crossover happens when the indicator crosses down over its signal line. The crossovers usually indicate a trend reversal.
When the TRIX crosses the zero line from bottom to top, it turns positive. This indicates that the trend has turned bullish. Therefore, traders can look for opportunities to place buy orders in the market.
When the TRIX breaks the zero line in a downwards direction, it turns negative. This indicates that the trend has turned bearish and traders can therefore look for opportunities to place sell orders in the market.
Signal Line Crossovers
Trader also add a signal line on the TRIX indicator in order to select the best entry points. The signal line is a moving average of the TRIX indicator, and will therefore lag 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 ranging and trending markets.
In a ranging market, a signal line crossover indicates that resistance and support areas have been upheld in the market. In a trending market, a signal line crossover confirms an end to the price retracement and the resumption of the main trend.
Bullish and Bearish Divergences
The TRIX indicator can also come into play if you want to identify when important turning points will happen in the market. You can achieve this by looking at divergences, which occur when a stock’s price is moving 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 makes a lower low. When this happens, it implies that a bullish price reversal is about to happen and the downtrend is losing momentum.
A bearish divergence occurs when the TRIX makes a lower high and the price of the underlying stock makes a higher high. This implies that a bearish price reversal is about to happen and the uptrend is losing momentum or weakening.
Bullish and bearish divergences form when a stock’s price and the indicator don’t 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 momentum 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 displays the percent rate of change of a triple exponentially smoothed moving average of the closing price of a stock.
The indicator is commonly used to filter out price movements that are considered unimportant or insignificant. Additionally, it can be used to anticipate turning points in a trend through its divergence with a stock’s price.
Remember that TRIX generates more accurate (but fewer) signals when used in higher timeframes. In shorter timeframes, the indicator tends to give false signals.
When paired with other technical analysis or fundamental analysis tools, TRIX can help traders to get accurate signals.