The TRIX (Triple Exponential Average) was developed in the early 1980's by Jack Hutson, an editor for a magazine called Technical Analysis of Stocks and Commodities. It uses three exponential averages to generate signals, help confirm trends, and also highlight potential reversals.
It is a four-step process to calculate TRIX:
- A 14-period exponential moving average (EMA) using closing prices
- A 14-period EMA of result from step 1
- A 14-period EMA of result from step 2
- A 1-period percent change of step 3
The result is ‘triple smoothed’ which basically provides an indicator that is taking a moving average of a moving average of a moving average...hence the name.
TRIX can be used in two ways. Firstly, it can be used as an oscillator that identifies oversold and overbought markets and like many others, it oscillates around a zero line. When it is used in this fashion, a positive value indicates a bullish market while a negative value indicates a bearish market. Secondly, it can also be used as a momentum indicator. If TRIX is used in this way, a positive value suggests momentum is increasing while a negative value suggests momentum is decreasing.
Many traders use the 0-line crossover as a signal for trade. This strategy is extremely simple and gives clear entry points:
- For long trades, buy when the TRIX crosses above 0 if there is price action movement that proves the rate of the instrument has started to reverse higher.
- For short trades, sell when the TRIX crosses below 0 if there is price action movement that proves the rate of the instrument has started to reverse lower.
Like many indicators, divergences can also provide good trading signals, although these are slightly more complicated.
Divergences between price and TRIX can indicate significant turning points in the market:
- A bullish divergence occurs when the instrument forms a lower low, but the indicator forms a higher low. The higher low shows less bearish momentum that may suggest a bullish reversal.
- A bearish divergence forms when the instrument forms a higher low, but the indicator forms a lower high. The lower high shows less upside momentum that may suggest a bearish reversal.
The TRIX is an advanced analysis tool but only because it can be used to provide trading signals both as an oscillator and a momentum indicator. However, the actual calculations are straightforward. In addition, as a less popular indicator than some of the others it perhaps has some extra value as providing signals that other indicators (and people) might not be watching.