In technical analysis of stocks, understanding and interpreting an indicator is paramount. Traders always want to get a grip on an indicator that provides good trading calls. On the other hand, technical analysts are always on the lookout for an indicator that can help them simplify and analyze the enigmatic nature of stock price movements.
We all know that there is no holy grail in the stock market. But there are indicators and oscillators that rationally analyze stock movements and create different trading opportunities. An efficient indicator rationalizes the stock market price movements.
Trix is an efficient indicator. Trix helps the traders to understand the price momentum. Trix also behaves like an oscillator and helps the traders to find out the overbought and oversold zones.
In this article, we will find out why the TRIX indicator is an efficient indicator and how it works.
What is the TRIX Indicator?
TRIX indicator is a triple exponential moving average or triple exponential average (Trix) indicator.
In TRIX, we find the combined effect of three exponential moving averages in a combined form. That is how the name developed. Tri means three and the X stands for the exponential moving average.
TRIX indicator is a comparatively modern indicator. Jack Hutson developed it in the early 1980s.
Jack Hutson created it to find a combined solution of a trend indicator and an oscillator. It oscillates across a zero line to show the trend. And peaks and troughs of the TRIX curve help to identify overbought and oversold zones.
TRIX is also called an “Impulse indicator” as it clears records the positive and negative impulses in the market. In other words, the TRIX indicator ably shows growing and sinking impulses of stock prices.
Other indicators similar to the TRIX indicator are the MACD (moving average convergence divergence) and RVI (relative vigour index).
What Does the TRIX Indicator Tell the Traders?
We already know that the triple exponential average TRIX indicator is a momentum indicator as well as an oscillator. Hence a trader gets all the advantages of using a momentum indicator and also an oscillator. The triple exponential average TRIX indicator oscillates around a zero line. The indicator moves like a wave across the zero line by going up and down.
Many traders prefer to buy when the Trix lines go up from below and cross the zero line. Similarly, sell signals occur when the Trix line breaches the zero line.
Also, as other oscillators do, the Trix line shows us the oversold and overbought market.
Traders also find the divergence to be very useful. Divergences are created when the price movement direction is not in agreement with that of the triple exponential average Trix indicator. There are bullish and bearish divergences that the traders find useful during trade decision-making.
How is TRIX Calculated?
The TRIX indicator is a triple-smoothed EMA, of a double-smoothed EMA of a primary EMA. It is represented by a curved line. It is a combination of three exponential moving averages.
Hence, we need a step-by-step calculation to find the TRIX indicator. Let’s see how it is calculated.
- Calculate the n-period exponential moving average of the closing price.
- Then we calculate the n-period EMA of the moving average calculated in step 1.
- In this step, we calculate the n-period EMA of the moving average calculated in step 2.
- Lastly, calculate the one-period percent change of the moving average calculated in step 3. This is a 1-period percent of rate-of-change (ROC) of triple smoothed EMA calculated in step 3. This allows the technical analysts to find the speed at which the variable changes within a specified period.
The alphabet n stands for a specified period. In general, a 14-period is calculated in place of n. In case we are calculating TRIX of a daily price of a stock, we use the 14-day period.
How to Trade using TRIX?
TRIX is a trend-following indicator. It helps to keep the investor in trend for the specified period or shorter than that. As it is a triple-smoothed exponential moving average, it smooths out whipsaw movements in a trending market and stops the trader from getting confused due to price volatility.
But in a range body market, this indicator creates whipsaws and false signals. Hence it is best to use TRIX in a trending market.
There are many ways a trader can trade the TRIX indicator. In the next section of this article, we will learn how to use TRIX in a chart and how to use it in a trade, along with the pros and cons.
How to Trade with TRIX Indicator Signals?
Zero Line Cross
The TRIX indicator oscillates around the zero line. When the Trix line goes over the zero-line it has a positive reading. When the line comes below the zero line, the indicator turns negative.
Traders may buy the stock when the Trix turns positive by crossing the zero line. Similarly, when the Trix line goes below the zero line, the trader may sell the stock.
Zero line cross for a buy signal
Let us see how the buy signal is generated after the Trix indicator crosses the zero line from below and turns positive. In the chart shown below, the Trix indicator line stays above 0 (zero line) and stays in the positive zone. That creates a buy signal. The area where the buy signal was created is marked.
We can also see how the stop loss was created. It is placed just below the low of immediate swing low.
The exit price will be near the next resistance or at a pre-decided risk/return ratio. Some traders also like to book profit at a fixed percentage or wait till the next downtrend occurs.
Zero line cross for a sell signal
A zero-line cross also creates a sell signal when Trix comes from above and enters the negative zone convincingly. In the chart below, we can see price broke down below the trend channel for the second time, when Trix went into negative territory and stayed there. This failed pullback gives an effective sell signal.
However, trading alone on the basis of zero-line crosses is not recommended. Another technical indicator creates more efficient trading signals.
Oversold and Overbought Conditions
The Trix indicator also shows the overbought and oversold conditions. When the Trix indicator enters the positive zone and reaches its peak, an overbought condition is created. From the peak, the indicator is supposed to come down as well as the price.
Similarly. when Trix comes down and reaches its lows, an oversold condition is created. The Trix and the price both are supposed to go up from those positions.
Divergence is another signal every experienced trader looks for. A divergence signal helps the trader to make right trading decisions and save the trader from trading on a false signal. Divergences can be either bullish or bearish.
Shown below is an example of divergence. In the chart below, we can see the price is making higher highs in a series. But the Trix indicator is making lower highs at the same period. This situation creates a divergence.
As the indicator is coming down even after the price is making new highs, we can assume that the price action is weak and the price will come down, sooner or later. Therefore, after seeing this divergence, the trader would not buy the stock as the current price action is supposed to be weak.
But a trader will also keep in mind that such signals do not work well.
Ideal Settings for TRIX Indicator
Traders know that most of the indicators are customizable and the parameters can be set as required. With such options open, a trader also wants to know the best setting parameters that suit most of the trading conditions.
Trading conditions differ widely. Some prefer intraday trading, some go for swing trading and there are others who want to invest in the market and stay invested.
Trix indicator is mostly used with a 14-period setting which is the default setting. Some also prefer a 15-period setting. A trader may want more stable signals. For them, the default settings work well in a trending market. But for a scalper, who wants more sensitivity, they may opt for a shorter time frame, say a 12-period or a 9-period setting.
As we know, no single indicator gives the right signals all the time. Therefore, a combination of indicators is required to create a trading system. The same is true for Trix. In the next section, we will see which indicators form the best trading system with Trix.
Combining TRIX with Other Indicators
TRIX and RSI
We can use RSI with Trix. The relative strength indicator (RSI) measures the strength of a trend and its momentum. When the RSI is used in conjunction with TRIX, we can get more efficient trading signals.
The most important thing is that this combination works very well in a range-bound market. If we use Trix alone in range-bound market conditions, the indicator creates many false signals and is therefore not suitable for trading in those conditions. RSI helps to overcome this drawback.
Strong buy signals occur when both Trix and RSI are in an oversold condition. Also, a trader does get strong sell signals when both the indicators are in the overbought condition.
TRIX with MACD
Both MACD and TRIX are similar kinds of indicators. When both indicators are used together false trading signals may be avoided. When Trix crosses the zero line and MACD signal line crossover happens together, a strong buy signal is created. A similar signal can be had during a bearish trend.
In the chart above, we can see how a strong buy signal is created when Trix crossed the zero line and entered the positive territory and also the MACD line has already crossed the signal line. This is a recent live hourly chart of the State Bank of India.
A strong buy signal was created at around 11 0’clock on 27th June, 2022. The buy signal remained valid till today, because the Trix indicator hasn’t yet entered the negative territory. We can say this is an efficient trading signal.
TRIX with EMA
When a 9-period EMA is used with an 18-period Trix indicator, efficient trading signals are created. We use the 9-period EMA as a signal line. When Trix crosses the signal line and above the zero line, a strong buy signal is created and it continues till the Trix line comes below the signal line.
In the daily chart of Maruti shown below, we can see how the buy signal is created and how long it continued. It is exactly as per the rule explained above. The sell signal occurs in the opposite condition.
PROS and CONS of using TRIX Indicators
Pros of TRIX Indicator
Trix can be used with all assets and on all time frames. Trix works efficiently as an impulse indicator. Trix gives good breakout signals. It is also popular for finding divergences.
Cons of TRIX Indicator
Trix, when used alone, does not work well in trading market conditions. Too many false signals come up during range-bound market conditions. In those conditions, the Trix line crosses the zero line repeatedly without a great move in price action.
The Trix indicator joins an oscillator and a momentum indicator in one indicator. Therefore, this indicator can work like an oscillator as well as a trend momentum indicator. Trix works efficiently in trending market conditions. Also, Trix works very efficiently with other indicators like RSI, MACD, and EMA. It is better to use any of these indicators with Trix to avail efficient trading signals.