TRIX- TRIX is based upon the concept of exponential moving averages, so before we jump into this indicator, let’s do a quick review.
A moving average in the technical analysis world is simply the average price of a stock or index over the last (x) number of days.You can choose any number of days you like, but the more days you use, the slower your moving average line moves. Why does that matter? If you’re using moving average lines as a trade signal, slower moving lines means delayed buy/sell signals (although slower moving lines result in fewer errant signals).
Any moving average is going to be at least partially delayed. But what if there was a way to make a moving average line considerably smoother, without sacrificing responsiveness?
This can be achieved by plotting a moving average of a moving average. In fact, we’re going to examine a moving average of a moving average of a moving average.
This is the method used to plot the TRIX (short for TRIple eXponential) moving average indicator.
As the lower portions of chart illustrate, the TRIX lines still move relatively quickly. There is one twist here – the TRIX line is not exactly a moving average of a price. It’s actually the moving average of the changes in price. By focusing on price changes rather than the absolute closing prices, the TRIX indicator can be centered around a zero line (thus creating an oscillator).
Just using the cross of that zero line as a buy or sell signal would have gotten you into some decent moves, as far as traders are concerned anyway. But even more important than that, using this cross of the zero level as your minimum requirement would have kept you out of a lot of errant trades.
This implies that it pays to be patient and not get pulled into a market move that is unproven. A triple-smoothed moving average line like TRIX will weed out a lot of the day-to-day volatility, but it will still get you into a trade without sacrificing a lot of time before entering the trade.
In the NIFTY chart below, we’ve plotted a 9 day TRIX line (White). Look at how the TRIX line began to turn higher on March 9th, the exact day the market started to rally from the recent lows. The TRIX line started to rally hard and fast towards the zero line, ultimately crossing it on March the 20th . The market participants were skeptical of that rally, but the TRIX line was telling the story loud and clear.
Although the usefulness of the TRIX line is clear, it’s still not a perfect indicator. For starters, once a buy or sell signal is given by a cross of the zero line, it won’t technically make another signal until that line is crossed again. That could take a long time though, so if you missed the boat, another one might not come by for a while. In a similar sense, there is no real ‘exit’ signal. The TRIX entries are great, but if you wait for another cross of the zero line to unwind your position, you’ve probably given back a large part of your gain. All the same, the TRIX line is a great tool to add to your arsenal. Just be sure to pick a different tool to signal your exits.
