Introduction to TRIX
TRIX (Triple Exponential Average Indicator) is a momentum oscillator that helps traders identify trend direction, overbought and oversold conditions, and potential reversals. It was developed by Jack Hutson in the 1980s and is primarily used in technical analysis to smooth price movements and filter out market noise.
TRIX is calculated using the triple exponential moving average (TEMA) of the closing prices over a given period, typically 14 or 15 periods. By using multiple smoothing layers, it eliminates minor fluctuations and focuses on significant trends. The key advantage of TRIX is that it reacts quickly to price changes while avoiding whipsaws common with simple moving averages.
How to Use TRIX in Trading
TRIX generates buy and sell signals based on crossovers, divergence, and zero-line behavior. The most common ways to use TRIX in trading include:
1. TRIX Signal Line Crossover
One of the simplest ways to use TRIX is by pairing it with a signal line (usually a 9-period moving average of TRIX itself). The crossovers between TRIX and the signal line generate trading signals:
- Buy Signal: TRIX crosses above the signal line.
- Sell Signal: TRIX crosses below the signal line.
Example:
Suppose a stock is in a consolidation phase and TRIX moves sideways. Once TRIX crosses above its signal line, it indicates upward momentum. A trader could enter a long position at this point, placing a stop loss below recent support.
2. TRIX Zero Line Crossovers
TRIX oscillates around a zero line, which represents trend direction:
- Bullish Signal: TRIX moves above zero, suggesting a strong uptrend.
- Bearish Signal: TRIX moves below zero, indicating a downtrend.
Example:
If a trader notices TRIX moving from negative to positive, they might enter a long position in anticipation of an uptrend continuation. Conversely, if TRIX drops below zero, they may exit long trades or enter short positions.
3. TRIX Divergence Trading
Divergence occurs when TRIX and price action move in opposite directions, often signaling trend reversals:
- Bullish Divergence: Price makes a lower low, but TRIX forms a higher low.
- Bearish Divergence: Price makes a higher high, but TRIX forms a lower high.
Example:
If a stock reaches a new high but TRIX fails to confirm the move, it could indicate weakening momentum. Traders may prepare for a reversal and consider shorting the stock when TRIX starts declining.
4. TRIX Trend Confirmation Strategy
TRIX can be combined with other trend indicators like Moving Averages or the MACD to confirm trends before entering trades.
- Combine TRIX with a 50-Day SMA: If TRIX is positive and the price is above the 50-day SMA, traders can enter long trades.
- Combine TRIX with MACD: If TRIX crosses above zero and MACD confirms a bullish crossover, it provides a strong buy signal.
5. TRIX with RSI for Overbought/Oversold Conditions
Since TRIX is a momentum indicator, it pairs well with the Relative Strength Index (RSI) to validate overbought and oversold conditions.
- If TRIX crosses above zero and RSI is above 50, it confirms bullish momentum.
- If TRIX crosses below zero and RSI is below 50, it confirms bearish momentum.
- If TRIX crosses above zero but RSI is over 70 (overbought), a reversal might occur.
Example:
A trader notices TRIX moving above zero while RSI is still below 50. This could indicate early bullish momentum, presenting an opportunity for an early long entry.
Advanced TRIX Trading Strategies
6. TRIX with Bollinger Bands
TRIX helps traders confirm breakouts from Bollinger Bands, which measure volatility. A setup might include:
- Entering long when price breaks above the upper Bollinger Band and TRIX is rising.
- Entering short when price breaks below the lower Bollinger Band and TRIX is declining.
7. TRIX Scalping Strategy
For short-term traders, TRIX can be used for scalping by applying it to a 5-minute or 15-minute chart.
- Look for TRIX to cross above zero with high volume.
- Exit when TRIX flattens or reverses direction.
8. TRIX Swing Trading Strategy
Swing traders use TRIX on the daily or 4-hour chart to capture short- to medium-term moves.
- Identify strong trends using TRIX crossovers and enter trades accordingly.
- Hold trades until TRIX reverses direction.
Risk Management While Trading with TRIX
- Use Stop-Loss Orders: Place stops below the recent swing low in an uptrend or above the swing high in a downtrend.
- Combine with Other Indicators: Never rely solely on TRIX; use it with volume, trend lines, or other indicators.
- Avoid False Signals: TRIX can sometimes generate false crossovers in choppy markets, so confirm with other tools.
Conclusion
TRIX is a versatile momentum indicator that helps traders identify trends, reversals, and entry/exit points. By combining it with other indicators like RSI, MACD, or moving averages, traders can improve accuracy and avoid false signals. Whether used for scalping, swing trading, or trend confirmation, TRIX offers valuable insights into market momentum.
By practicing these strategies in a demo account and refining entry/exit rules, traders can effectively incorporate TRIX into their trading systems for consistent profitability.