Investors can use the TRIX indicator to provide trade signals, help confirm trends and spot potential price reversals. TRIX is a fairly simple looking indicator that helps smooth out price fluctuations and shows the direction of dominant momentum (or lack thereof) in a stock or other asset. Before using the indicator, be sure you understand how to interpret TRIX, its strategies, as well as its limitations.
The TRIX Indicator
The TRIX indicator smooths price data and then looks at the daily (or whatever time frame is being used) percentage movement of that smoothed price data. This filters out much of the price noise that’s seen on the price chart. TRIX will rise on sustained moves higher in price, and will fall on sustained moves lower in price.
Since TRIX is smoothed (see calculation below) it takes time to react to changes in price direction. This can be beneficial, because not every little pullback means a trade should be exited or that the trend is going to reverse.
0.0 (zero) on the indicator is used a baseline. When the TRIX is below 0.0, and especially when it’s moving lower, the trend is considered down. When the TRIX is above 0.0, and especially when it’s moving higher, the trend is considered up.
All charts created using FreeStockCharts.com.
TRIX helps confirm trends, indicates when a trend reversal may be underway, and can also be used to generate trade signals.
Divergences are another useful aspect of the indicator. Bullish divergence is when the price makes a lower low but the TRIX doesn’t. It indicates selling momentum is not as great as it was on prior price drop. Weak selling momentum could lead to an eventual reversal.
Bearish divergence is when the price makes a higher high, but the TRIX doesn’t. It signals weakening buying momentum, which could result in an eventual reversal.
Divergences offer analytical insight and can be used to help confirm the strategies discussed in the TRIX Strategies section below. On their own, however, divergences are not high quality trade signals.
Divergences can occur for extended periods of time, resulting in:
- Missed opportunities because of not trading with a strong trend when there was a divergence.
- Traders taking losing trades because a divergence convinces them the price trend will reverse, but it doesn’t.
How TRIX is Calculated
It is a four step process to calculate TRIX. The indicator is “triple smoothed,” which means we are taking a moving average of a moving average of a moving average.
- 15-period exponential moving average (EMA) using closing prices.
- 15-period EMA of result from step 1.
- 15-period EMA of result from step 2.
- 1-period percent change of step 3.
Step 4 is the TRIX, which will fluctuate from period to period.
A different number of periods could be used in the calculation. Increasing the number of periods, for example to 40, will decrease the sensitivity of the indicator and may be more useful to long-term traders. Decreasing the number periods, for example to 10, will increase the sensitivity of the indicator; very short-term traders may prefer this.
Understanding how the indicator is calculated is important for really understanding the indicator, but calculating by hand is not required. Many platforms including TradeStation and Thinkorswim, as well free charting applications such as Stockcharts.com and FreeStockCharts.com, provide the indicator.
As an additional step, a moving average (which is visible) can be applied to the TRIX indicator. This is useful for providing crossover trade signals. The moving average is typically of shorter length than the number of periods used in the TRIX calculation. For example, if using a 15-period TRIX, a 9-period moving average could be applied to it.
A popular TRIX strategy is to watch for price reversal signals, such a trendline break, which is confirmed by a TRIX zero line crossover.
For long trades, buy when the TRIX crosses above 0.0 if there is some evidence that the price has started to reverse higher (trendline break, higher swing high or higher swing low).
For short trades, sell/short when the TRIX crosses below 0.0 if there is some evidence that the price has started to reverse lower (trendline break, lower swing high or lower swing low).
This strategy is simple and is mainly useful for entries. Unfortunately, the entry point has little regard for an appropriate place to put a stop loss. To control risk, a stop loss must be implemented, preferably just above a recent high if taking a short position, or just below a recent low if taking a long position.
Waiting for the price to move back across the zero line to exit the trade can mean giving back a lot of profit. For this reason, many traders prefer a signal line crossover strategy instead.
By adding a moving average (MA) to the TRIX indicator, traders buy when the TRIX crosses above the slower moving MA (called the signal line), and sell when the TRIX crosses below the MA (signal line). This method generally provides more timely trading signals, which means the entry point is often closest to a logical stop loss area, and a crossover in the opposite direction can be used as an exit point.
If there is an overall uptrend in effect, only use the long trade signals, and use bearish signal line crossovers as exit points. If there is an overall downtrend, only use the short trade signals, and use bullish signal line crossovers as exit points.
For a long entry, put the stop just below a recent low. For a short entry, place the stop just above a recent high. This will help control risk on the trade. If a stop level is a long way away, as in the second trade for Figure six below, you may opt to avoid the trade.
The TRIX doesn’t always reflect what is happening in the stock price. The price may be trending higher while TRIX is trending lower. This is a divergence which signals a potential end to the trend, but a trend can persist for a very long time even on weakening momentum. Using the TRIX in this situation can be deceiving, and can result in missing out on some great upside potential in the price.
False crossovers are another common issue. A false crossover is when the TRIX crosses above or below the zero line, only to snap back the other way, resulting in a losing trade. A false signal line crossover is when the TRIX crosses the signal line, only to cross back the other way shortly after.
False signals can result in numerous losses within a short period of time. Use longer-term trend analysis to help avoid some of these false signals. Ideally, only take buy signals when an overall uptrend is underway, and sell signals when an overall downtrend is underway.
The indicator also has no regard for setting a stop loss. A stop loss must be placed manually above a recent high (shorts) or below a recent low (longs). If there is no respective high or low near the entry point, consider avoiding the trade.
The Bottom Line
TRIX is a momentum indicator that is used to confirm trends, potentially spot reversals, and provide signals. Trade signals occur when the indicator crosses above (buy) or below (sell) zero, indicating a trend change is underway. Crossover signals occur when the TRIX crosses above (buy) or below (sell) the signal line. Both types of crossovers are prone to “false” moves; ideally trade in the direction of a longer-term trend to minimize these occurrences. Divergences are also used to analyze price, but they shouldn’t be acted on alone; however, divergences can be useful for providing some confirmation for other trading signals.
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