Technical Indicator MEGA Reference Part 56 – Triple Exponential Average (TRIX)

Triple Exponential Average (TRIX)

The Triple Exponential Average (TRIX) is an indicator that might be used to identify divergences and overbought and oversold conditions, as well as attempting to give potential buy and sell signals. Furthermore, the TRIX attempts to filter out short-term noise.

A 9-day TRIX is shown below in the chart of the E-mini S&P 500 Futures contract:

 

TRIX Potential Buy Signal

A trader might consider buying when the TRIX crosses above the zero line.

TRIX Potential Sell Signal

A trader might consider selling when the TRIX crosses below the zero line.

The potential buy and sell signals are typically for entries. Using the above potential buy and sell signals for exits might prove profitless. A trader, therefore, might consider exiting a long entry when the TRIX enters the oversold area and begins to turn downwards toward the zero line. Likewise, a trader might exit a short when the TRIX enters the oversold area and begins to turn upward and move toward the zero line.

Another potential use of the Triple Exponential Average is to confirm price action or not confirm price action through divergences.

TRIX Divergence

The Triple Exponential Average (TRIX) might be used in an attempt to identify divergences as well as confirm price action.

  • Confirmation: TRIX is rising and the price of the stock, currency, or future is rising. Likewise, when the TRIX is falling and the market price is falling.
  • Divergence: TRIX is rising or neutral and the market price is falling; or TRIX is falling or neutral and the market price is rising.

Possible confirmations and divergences are shown below in the chart of the E-mini S&P 500 Futures contract:

Low #1 to Low #2

The E-mini S&P 500 Futures contract made a higher low and was likewise confirmed by the TRIX indicator making a higher low as well.

High #1 to High #2

The e-mini future managed to make higher highs; however, the Triple Exponential Average made a quite noticeable lower high and low. This bearish divergence warned that prices might change course and that traders might do well to reduce their long positions.

The TRIX making lower highs combined with the e-mini's double top formation and subsequent neckline break might also be an indication that the recent price rise was likely over.

Low #3 to Low #4

During the S&P 500 e-mini's downtrend, it managed to make a significant lower low. In contrast, the Triple Exponential Average made equal lows, generally a sign that a potential price bottom was forming. Therefore, traders might see this TRIX divergence and might begin to buy to cover their short positions.

The Triple Exponential Average (TRIX) attempts to screen out short-term volatility and hence, might be a valuable tool for medium and longer-term periods for uncovering potential divergences in price as well as giving possible buy and sell signals.

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