What is the TRIX Indicator?
Known as a momentum indicator by technical traders, the Triple Exponential Moving Average Oscillator (TRIX) is used to show the percentage change in a triple exponentially smoothed moving average. The indicator is designed to filter out any movement in price which is deemed insignificant or unimportant, and it does this by applying the indicator to triple smoothing of moving averages.
Purpose of the TRIX Indicator
The indicator was developed by Jack Hutson in the 1980’s and became widely used as a tool in technical analysis to identify diversions and directional cues in trading. While the TRIX indicator has multiple similarities to the Moving Average Convergence Divergence (MACD) indicator, the main difference between the two is that TRIX results are smoother because of the triple smoothing of the exponential moving average (EMA).
TRIX calculates a triple EMA of the log of the price input over the period of time specified by the length input for the current bar. The current bars value is also subtracted by the previous bars value. This prevents the indicator from including the cycles which are shorter than the period defined by length input.
How to Use TRIX in Forex Trading
As a trader, you can use TRIX to identify oversold or overbought currencies and you can also use it as a momentum indicator. The indicator oscillates around a zero line so when it is used as an oscillator, a positive value is indicative of an overbought currency pair, while a negative value indicates an oversold currency pair.
If it is used as a momentum indicator, a positive value can be indicative of increasing momentum, whereas a negative value indicates decreasing momentum. Most analysts trade under the assumption that when the TRIX indicator crosses above the zero line, that shows a buy signal and below the zero line shows a sell signal. As well as the fact that divergence between price and TRIX can be indicating significant turning points within the market.
The TRIX indicator offers two significant advantages for a trader. One being the indicator's ability to filter out market noise due to the use of the triple EMA calculation. This ensures the elimination of minor short term cycles that indicate changes in market direction. Another advantage is its ability to be a leading rather than a lagging indicator. TRIX is able to lead the market due to the fact that it measures the difference between each bar's smoothed version of the price information.