## What is the TRIX indicator?

The TRIX indicator is a momentum oscillator, which assists traders by identifying trending markets and price reversals. The TRIX indicator consists of three major components:

- horizontal zero line.
- the TRIX itself, which oscillates above and below the zero line.
- at the right side of the indicator, you are likely to find a percentage scale, which measures the change in the curved line.

## How is the TRIX calculated?

The curved line of the TRIX shows the percentage change of a triple smoothed exponential moving average.

For those of you that just scratched your head, let’s try explaining this again.

Imagine a regular price chart - then, add an exponential moving average, which of course calculates the price action. Next, add a second exponential moving average, which is based on the first exponential moving average. Lastly, add a third exponential moving average, which measures the movement of the second exponential moving average.

So, let’s quickly summarize to make sure we have not lost anyone!

The price is measured by the first exponential moving average, the first exponential moving average is measured by the second exponential moving average, and the second exponential moving average is measured by the third Exponential Moving Average. Try saying that fast three times.

One, two, TRIX! Surprise! This is where the name of the indicator is derived.

Now, what about the percentage change?

The percentage change is displayed as a line on the TRIX indicator itself and it measures the change in the third exponential moving average, which is called the triple smoothed exponential moving average.

Therefore, if the TRIX curved line has reached 0.1%, it means that the third EMA (the triple smoothed EMA, which measures the second EMA, which measures the first EMA) has recorded an increase of 0.1%.

Still a bit confused. Please continue reading the rest of this article as we hope to clear things up.

## What signals does the TRIX indicator provide?

- The simplest trading signal provided by the TRIX is “when crossing above zero go long and breaking below zero go short!”

- Another important TRIX signal is the identification of a divergence event. Divergence is a conflicting signal between the overall movement of the indicator and price action.

Divergence can occur on any time frame and are not predictable. When divergence occurs, it is likely followed by price movement in the opposite direction. For example, if the price is making higher highs but the TRIX is making a lower high on each price push, we can assume the stock is in the early stages of rolling over.

- Lastly, the TRIX indicator sometimes could draw formations, which are well known to the average trader. These are some of the formations you can find on the TRIX with their implications to the markets:

- Head and Shoulders – Bearish
- Inverted Head and Shoulders – Bullish
- Rising Wedge – Bearish
- Falling Wedge – Bullish
- Flag – Bullish
- Inverted Flag – Bearish
- Diamond – Bullish/Bearish
- Triangles – Bullish/Bearish

These well-known chart patterns have the same effect on the TRIX as they would on your standard price chart. These formations should not be taken as standalone signals, but can help support or invalidate a trade setup.

## Examples of successful TRIX trading systems

### Interaction of the percentage line with the zero level

As we have already stated, the basic signal of the TRIX indicator is the moment the TRIX interacts with the zero level in bullish or bearish fashion.

If you see the curved line breaking the zero level in a bullish direction, the indicator gives us a signal for an eventual bullish price move. If the curved line interrupts the zero level in a bearish direction, we are likely to see a price drop.

Below you will see a 30-minute chart, which displays the price movement of Facebook in October:

In the green circle, you will see the moment when the TRIX curved line breaks the zero level in a bullish direction and switches from the lower side to the upper side of the indicator. This is the moment where we would suggest opening a long position. As you see, after this moment, the price of Facebook starts a nice and steady bullish move, which results in a healthy profit.

### Divergence between TRIX and the chart

We all know that the divergences between a chart and its indicators often signals an upcoming change in the current price action.

Below you will see a 60-minute chart of Bank of America for September and October 2015:

We see that the TRIX indicator and the price of Bank of America are experiencing a bullish divergence. This is why we expect Bank of America’s price to increase soon.

Then we see the TRIX indicator move into positive territory.

This is our go long signal we have been waiting for patiently. We open a position and in the next 7 candles record a healthy increase over a couple of days.

### Discovering formations on the TRIX indicator

Again, chart patterns can form on the TRIX indicator itself.

Below, you will see the 60-minute chart of Apple during the months of September and October 2015.

An inverted head and shoulders pattern forms on the TRIX, where the blue straight line is its neckline.

In the green circle, you will see the moment where the TRIX percentage line breaks the blue neckline in a bullish direction. At the same moment, the TRIX line breaks the zero level to the upside. This is an interesting case where we get two bullish signals at once.

This is a great opportunity to get long the stock in preparation for an advance.

After a slight drop, the price starts an impulsive move higher.

## What is missing?

Now that we are familiar with the TRIX indicator, recognize its formations and can interpret these signals, what are we missing?

How are we going to implement a profitable TRIX trading strategy, when we still do not know when to exit our position?

Well, let us explore this point in greater detail.

For illustrative purposes, we have decided to demonstrate how the TRIX would work with a 50-period Simple Moving Average. Below you will see a 60-minute chart of LinkedIn for the month of September 2015:

The first green circle on the TRIX marks a moment where the curved line of the indicator crosses the zero line.

At the same time, the price of LinkedIn switches above its 50-period Simple Moving Average. Since we see bullish signals on both fronts, we go long.

Suddenly, the TRIX indicator starts moving in a bearish direction, while the price of LinkedIn is still increasing.

This has all of the characteristics of a bearish divergence and we prepare ourselves for a potential change in price action.

LinkedIn eventually breaks the 50-period Simple Moving Average to the downside. This is our “**run for the hills**” signal.

Therefore, we close our position and collect our healthy profits.

Now, the TRIX breaks the zero level line in a bearish fashion, which happens after the price has switched below its 50-period Simple Moving Average and we get short.

Fortunately, the price goes in our favor and begins to drop as expected.

## In Conclusion

- The TRIX indicator consists of a curved line, which fluctuates in positive and negative territory.
- The curved line measures the percentage change in a triple-smoothed EMA.
- If the TRIX goes above zero, this is a long signal. If the TRIX goes below zero, this is a short signal.
- The TRIX can help identify bullish and bearish divergences.
- The movement of the TRIX indicator can develop into well-known chart formations.
- The TRIX indicator should be combined with other technical indicators to confirm entry and exit points.