Long-time readers of Technical Analysis of Stocks and Commodities magazine may remember that is was Jack Hutson, an editor of the magazine, that first introduced TRIX to the technical community.
What Is TRIX?
The triple exponential average (TRIX) indicator is an oscillator used to identify oversold and overbought markets, and it can also be used as a momentum indicator. Like many oscillators, TRIX oscillates around a zero line. When it is used as an oscillator, a positive value indicates an overbought market while a negative value indicates an oversold market. When TRIX is used as a momentum indicator, a positive value suggests momentum is increasing while a negative value suggests momentum is decreasing. Many analysts believe that when the TRIX crosses above the zero line it gives a buy signal, and when it closes below the zero line, it gives a sell signal. Also, divergences between price and TRIX can indicate significant turning points in the market.
TRIX calculates a triple exponential moving average of the log of the price input over the period of time specified by the length input for the current bar. The current bar's value is subtracted by the previous bar's value. This prevents cycles that are shorter than the period defined by length input from being considered by the indicator.
Advantages of TRIX
Two main advantages of TRIX over other trend-following indicators are its excellent filtration of market noise and its tendency to be a leading than lagging indicator. It filters out market noise using the triple exponential average calculation, thus eliminating minor short-term cycles that indicate a change in market direction. It has the ability to lead a market because it measures the difference between each bar's "smoothed" version of the price information. When interpreted as a leading indicator, TRIX is best used in conjunction with another market-timing indicator - this minimizes false indications.
On this chart of the Dow Jones Industrial Average covering Sept 2001 to Sept 2002, you can see by the arrows that the TRIX indicator, from the high of Mar 2002 to the low watermark set in Jul 2002, was falling from a level of plus 40.45 to a minus 83.07. This example clearly shows that there is not any lag time between the DJIA tuning south and the TRIX indicator following this price action. (Tradestation 6 charting software uses a nine-day moving average as the default, which helps dramatically for timing the directional moves.) We have seen that the shorter the time frame, the more accurate the indicator will signal the move in the issue we are studying.
Using two moving averages offers an advantage: by watching the fast moving average cross over the slow moving average, the trader can recognize the change in direction of price action. (See Understanding Moving Average Covergence Divergence.) Using two different time spans for the TRIX is also an excellent timing technique.
In the 2001-2002 chart of the S&P 500 Index above, the first highly visible move was the downturn of the market after the disasters of Sept 11. There was a subsequent rebound in the third week of September, with the 15-day moving average turning quicker than the 30-day moving average. But keep in mind that the confirmation from the 30-day indicator is more conservative, so it assures the average buy-and-hold investor that the trend has truly turned. Look closely at how well the turns in the 15-day moving average line up with the turns in the price action.
This idea of a trendline violation in price can be looked at from another angle. Martin Pring, a well-known technician and author, noted this in his writings:
"If a series such as the slow moving 30-day TRIX is overbought but still rallying, then a trendline violation in the price will almost certainly lead or correspond with a peak in the TRIX. This is because a trendline violation signals a break in upside momentum. The penetration will be followed by either a decline or a temporary sideways move. In both cases this implies that the additional upside momentum required for an advancing TRIX is no longer available."
TRIX is one of the best trend reversal and momentum indicators we have in our daily arsenal.
Remember it's your money - invest it wisely.