Hello friends, i believe we are all enjoying the assignment from our respective professor, well I am.
I use this opportunity to welcome you to my week 3 assignment post for Season6 on the steemit crypto academy.
This week we shall be learning from Professor @kouba01 and we shall be learning how to trade using the Trix Indicator.
Please follow along as we embark on this journey.
Discuss in your own words Trix as a trading indicator and how it works
Discuss in your own words Trix as a trading indicator and how it works
The Trix Indicator, also known as triple exponential average can be explained as a momentum Indicator which helps to show the percentage change in a three times exponentially smoothened moving average.
The Trix Indicator was designed in a unique way which helps to filter out insignificant price movements in the market.
The Trix Indicator is similar in nature to the MACD.
The Trix Indicator was developed in the 1980s by Jack Hutson and this Indicator has become popular over the years as it helps traders to detect diversions and directional cues in the market.
The Trix Indicator, although similar in nature to MACD, helps to produce signals that have been exponentially smoothened three times.
IT'S WORKING PRINCIPLE
The Trix Indicator helps to spot overbought and oversold markets, and it is sometimes used as a momentum Indicator.
And in common to other oscillators, the Trix Indicator tends to oscillate round the zero line.
An extreme positive value of the Trix Indicator, when used as an oscillator, signals an overbought market while it's oversold region is signaled by an extreme negative value.
And when it is used as a momentum Indicator, a negative Trix value signals a decrease in momentum and a positive Trix value signals an increasing momentum.
It is believed by technical analyst that whenever the trix Indicator crosses above it's zero line, it's signaling a buy order and when it crosses below the zero line, it signals a sell order.
It is good to note that divergence between the Trix and price in the market indicates important turning point in the market.
SCREENSHOT FROM TRADING VIEW
Thee above Screenshot is that of the pair BTCUSDT, and as seen above, the Trix Indicator was successfully added.
Please follow along as we explain further on the Trix Indicator.
Show how one can calculate the value of this indicator by giving a graphically justified example? how to configure it and is it advisable to change its default setting? (Screenshot required)
Show how one can calculate the value of this indicator by giving a graphically justified example? how to configure it and is it advisable to change its default setting? (Screenshot required)
To get the calculation of this Indicator is an easy task.
As it is known, the Trix Indicator can be calculated from the combination of 3EMAs.
So we can get the calculation of these EMAs separately, then combine it.
Please watch how it is done;
EMA= [Weight × Closing price] + [ Previous Day EMA] × [1 - Weight].
So therefore!
1st EMA= [Weight × Closing price] + [Previous Day EMA] × [1 - Weight].
2nd EMA= EMA[ 1st EMA]
3rd EMA = EMA[2nd EMA].
Where the 3rd EMA is the Tripple EMA.
Having gotten this calculation, we can now get the calculation for our Trix Indicator.
TRIX = [(3rd EMA × Closing price) - 3rd EMA (closing price - 1)] ÷ 3rd EMA (closing price - 1).
Below is a graphical representation of Trix Indicator on ETHUSD
SCREENSHOT FROM TRADING VIEW
CONFIGURATION
To configure the Trix Indicator, I clicked on the label of the indicator, that is, it's name on my chart. And the below appeared after which I clicked on settings.
SCREENSHOT FROM TRADING VIEW
After I clicked on the settings icon, another display appeared where I was shown the visibility section, the style section and the input section
SCREENSHOT FROM TRADING VIEW
From the input section as seen above, an analyst can change the time frame of the chart which will also affect the signals given by the Trix Indicator.
And a trader can also choose to change the length of the Indicator from it's default of 18.
SCREENSHOT FROM TRADING VIEW
From the style section as seen above, an analyst can change the color of the Trix Indicator and also the colour of it's zero line.
Based on the use of the Trix indicator, how can one predict whether the trend will be bullish or bearish and determine the buy/sell points in the short term and show its limits in the medium and long term. (screenshot required)
Based on the use of the Trix indicator, how can one predict whether the trend will be bullish or bearish and determine the buy/sell points in the short term and show its limits in the medium and long term. (screenshot required)
Take for example the moving average Indicator, it plays a major role in trend Identification, in that, whenever the price is above the indicator, it is signaling a bullish trend and at the same time serving as a support to the price.
Also, whenever the price is below the moving average, it signaling a downtrend and at the same time acting as a resistance to the price.
When it comes to the application of the Trix Indicator, whenever the Trix line crosses above the zero horizontal line, it is signaling that the market is in a bullish trend.
Check the screenshot below
SCREENSHOT FROM TRADING VIEW
The circle part of the screenshot above shows the point where the price crosses above the zero line.
And whenever the Trix line falls below the zero line, it is signaling a bearish trend.
This is graphically explained below
SCREENSHOT FROM TRADING VIEW
As seen above, the first circled region shows when the Trix Indicator crossed below the zero line, thus indicating the start of the bearish move.
The second circled region indicates when the Trix Indicator signaled a further decrease in price which was accompanied by a great volume.
The Trix Indicator as we know is an indicator that is used to filter out noise from the market and it is useful in both long term, medium and short term analysis.
When it comes to long term analysis, the trix Indicator is very effective as it helps traders to make good trading decisions.
SCREENSHOT FROM TRADING VIEW
The above screenshot is that of ETHUSD indicating a long term buy signal of the Trix Indicator.
As seen above, the price continued to make higher highs and higher lows after the trix Indicator signaled a buy opportunity.
SCREENSHOT FROM TRADING VIEW
The above screenshot is that of ETHUSD indicating va long term sell signal of the Trix Indicator.
And as seen above, the price continued making new lows although there were some setback.
It signaled this by crossing below its horizontal zero line.
But when it comes to short and middle term analysis using the Trix Indicator, there are some limitations experienced by traders, there are explained below.
SCREENSHOT FROM TRADING VIEW
From the screenshot above, the limitations of the short term trading is explained.
In phase 1, we can see that the trix Indicator crossed it's zero line but it gave this signal late, it gave the signal after the formation of several bullish candles.
In phase 2, it gave a good buy signal when appropriate, fine. But in phase 3, the Trix Indicator was still signaling a buy when the price had already begun a bearish move.
In phase 4 as seen above, the trix Indicator was signalling a downtrend while the market was in an uptrend and finally, in phase 5, the indicator was indicating a sell signal while the market was in an uptrend.
The above examples and some more are the limitations of the Trix Indicator when used for short term trading.
By comparing the Trix indicator with the MACD indicator, show the usefulness of pairing it with the EMA indicator by highlighting the different signals of this combination. (screenshot required)
By comparing the Trix indicator with the MACD indicator, show the usefulness of pairing it with the EMA indicator by highlighting the different signals of this combination. (screenshot required)
In my course of study and analysis, I came to understand that the use of one indicator as a standalone tool in technical analysis is a very big risk to take, as Indicators are prone to false signals, but when used alongside other analysis tool, a trader can filter out such signals.
As discussed earlier, the Trix Indicator is similar in nature to that if MACD, with the only difference that the trix Indicator produces smoothened signal.
The image below better illustrates it.
SCREENSHOT FROM TRADING VIEW
As seen above, the difference between the MACD and the Trix Indicator is clearly seen.
It is also good to note that pairing the two Indicators in a chart during analysis helps to filter out false signals.
The trix Indicator will produce a noise free market information, while the MACD will help to show all sensitive happenings of the market.
SCREENSHOT FROM TRADING VIEW
The screenshot above is that of ETHUSD showing the application of both the MACD and the Trix Indicator, as they both produce similar signals.
As seen above, as the Trix is crossing below the zero line, indicating a downtrend, so also is the MACD.
And when it indicated a bullish trend by crossing above it's zero line, the MACD produced the same signal.
Interpret how the combination of zero line cutoff and divergences makes Trix operationally very strong.(screenshot required)
Interpret how the combination of zero line cutoff and divergences makes Trix operationally very strong.(screenshot required)
As I have earlier stated, the importance of the zero line when trading with the trix Indicator is very important.
The zero plays a big role in the determination of the trend of the market, it also help to give trend reversal signals.
Whenever the trix Indicator crosses above the zero line, it is signaling an uptrend or in other words a bullish trend reversal and whenever it crosses below the zero line, it signals a bearish trend reversal.
A divergence on the other hand is said to occur when the price of the market moves contrary in the direction of the Indicator.
And a divergence usually occur when the market is about to experience a trend reversal.
A bullish divergence is said to have occur when the price makes a new low but the indicator is not able to make a new low.
This means that the price makes a lower low while the Indicator makes an higher low.
This condition usually signifies that the bears are getting weak and the bulls are about to take over the market.
SCREENSHOT FROM TRADING VIEW
The screenshot above shows a good example of a bullish divergence, as seen above, the price made a lower low while the Indicator made an higher low, which was accompanied by a bullish move.
A bearish divergence on the other hand is said to have occurred when the price makes a new high while the Indicator fails to do so.
In a sense, the price made an higher high and the Indicator made a lower high.
This signal is thus indicating that the bulls are getting weak and the bears are gaining strength in the market.
SCREENSHOT FROM TRADING VIEW.
The screenshot above is a chart showing the formation of a bearish divergence, which is a bearish trend reversal signal.
Is it necessary to pair another indicator for this indicator to work better as a filter and help eliminate false signals? Give an example (indicator) to support your answer. (screenshot required)
Is it necessary to pair another indicator for this indicator to work better as a filter and help eliminate false signals? Give an example (indicator) to support your answer. (screenshot required)
As I earlier said, as a technical analyst, it is not advisable to use an indicator as a standalone tool to make trading decision in technical analysis.
This is so because of the volatility of the market, and with this, there's no 100% guarantee of success in trading.
Inorder to get a confirmed signal, traders are advised to use multiple Indicators or better still make use of multiple trading techniques with different time frame.
To give answer to the above asked question, I will say yes, it is very necessary to use other Indicator to support the trix Indicator inorder to get a confirmed signal.
The image below illustrates better
SCREENSHOT FROM TRADING VIEW
The screenshot above is that of the pair ETHUSD, and in explaining the use of other Indicators, I made use of stochastic Indicator as a filter.
The image above are in three phases.
In phase 1, it is seen that the trix Indicator crossed above it's zero line which is an indication of an uptrend, but that signal was given late, it was given at the beginning of of the formation of a downtrend.
That signal can thus be filtered with the use of stochastic Indicator, as seen above, the stochastic Indicator was in an overbought region, thus indicating a downtrend.
In phase 2, the trix Indicator was below its zero line which is an indication of a bearish trend, while the price has started it's bullish move already.
The RSI played a big role in filtering out that signal by showing an oversold region, which is a bullish trend reversal signal.
In phase 3, the Trix and the RSI Indicators gave same signal, the trix Indicator was below its zero line which is indicating a downtrend and the stochastic oscillator was in it's oversold region, thus indicating a bearish move.
With this confirmation from both Indicator, a trader can confidently enter the market and place a sell order on the crypto pair.
List the pros and cons of the Trix indicator
List the pros and cons of the Trix indicator
ADVANTAGES OF TRIX INDICATOR
The trix Indicator is a good Indicator as it can be used as a multi-purpose Indicator.
It serves as an oscillator as it helps to identify overbought and oversold regions.
It also serves as a momentum Indicator by assisting in the Identification of trend.The Trix Indicator is highly compatible with other technical tools and can be used on different time frame.
The trix Indicator helps to filter out noise from the market by making use of the triple exponential calculation, and in a sense, eradicating insignificant short-term cycles that are signaling a change in market direction.
The Trix Indicator plays a vital role in the quick Identification of trend reversal pattern.
DISADVANTAGES OF TRIX INDICATOR
The Trix Indicator is prone to false signals and it is therefore not advisable to use as a standalone tool.
The Trix Indicator is noticed to be a lagging Indicator as it gives signals after the price action of the market.
CONCLUSION
The Trix Indicator is classified as one of the most important Indicators used in technical analysis, as it helps to filter out noise from the market, and at the same time serve as a multi-purpose tool.
I sincerely appreciate professor @kouba01 for this educative lecture on trix Indicator.