(1) Discuss in your own words Trix as a trading indicator and how it works.
(2) 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)
(3) 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)
(4) 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)
(5) Interpret how the combination of zero line cutoff and divergences makes Trix operationally very strong. (screenshot required)
(6)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)
(7) List the pros and cons of the Trix indicator
INTRODUCTION: Good day @koubal01 and every member of this great community. Welcome to my homework post for season 6 week 3. This is a very insightful, detailed, and rewarding lecture. Thanks for imparting knowledge.
Trix indicator also known as Triple Exponential Average (TEMA) is an indicator that is momentum-based and which got its name from what it is made up. Trix indicator is made up of three exponential moving averages which help to smoothen price fluctuation and hence, makes the identification of trends easier, helps in identifying support and resistance, etc.
An exponential moving average is an indicator that reacts very quickly to a change in price and with this, we can say it is pretty much prone to false signals which are as a result of the price fluctuations or price spike in the market and which could bring about bad trading decisions.
The cryptocurrency market is characterized by high volatility and this is why the use of three exponential moving average will put one at a safer side as the combination of three of these indicators will help to filter out the noises that are associated with a volatile market and hence, good trading decisions can be made.
We should also know that using only Trix indicator, the entry and exit point cannot be gotten but the information such as market trend, support and resistance, short-term trend changes, and pullbacks gotten from it when combined with other analysis tools will help one to get either the entry or exit point.
Both the Trix indicator and the Exponential moving averages almost works in the same manner. An exponential moving average is a trend-based indicator that helps in the identification of markets trend and it is represented by a dynamic line on the chart. Weight is added to the calculation of exponential moving averages (EMA) to correct the lags that are exhibited by simple moving averages (SMA).
The Trix indicator was developed by Jack Houston in 1980. This indicator was designed to tackle the issues associated with EMA such as the quick reaction to unnecessary price action or movements in the market which is disadvantageous to traders.
The Trix indicator does this correction or solves this issue by modifying EMA calculation and the aftereffect is that it produces a smooth chart that filters out the unnecessary price movements which generates false signals in the market.
Just as said earlier, Trix indicator make use of three EMA calculations and then subtracts out the lag to create a trend following indicator that reacts quickly to change in price. The Trix indicator is characterized with a line labeled as Zero line on which price swings above and below it. The position of the price tells us what trend and other information the market is undergoing.
In the case of trend direction, if the Trix indicator is above the zero line, we can say that the market is undergoing a bullish trend and if the Trix indicator is below the zero line, we can say that the market is undergoing a bearish trend.
Just as this indicator can help in identifying market trends, it can also help in identifying a change in trend. If the Trix indicator is above the average, and then drops below it, we can say that there is likely going to be a market reversal or that the price is entering a pullback and vice versa.
Just like any other technical indicator, Trix indicator makes use of previous data points (opening prices, closing prices, high points, low points) for its calculation. Trix indicator is characterized with three EMA and so it will be a good idea to know how EMA is calculated and then go ahead to know how Trix indicator is calculated.
EMA makes use of the closing price of previous data points over a period of time in its calculation and the period is a major factor and should be selected by each trader based on what suit them most.
EMA = *(closing price * weight) + [(Previous day EMA) * (1- weight)]
Let N = Period,
P = Current price
First EMA = EMA (P, N, 1)
Having gotten the first EMA, we can then proceed to smoothen it and obtain double EMA.
Double EMA = EMA (First EMA, N, P)
We proceed by smoothening the double EMA and then obtain a triple EMA.
Triple EMA = EMA (Double EMA, N, P)
Let us represent Triple EMA as X,
Trix indicator = { [ X(P) - X(P - 1)] / X(P- 1) }
The image below shows what the Trix indicator looks like graphically.
The use of this formula ensures that the effect of the market volatility is minimal on the indicator. Most platforms make use of 14 or 15 as the period of EMA but it can be modified to suits one’s need. While setting the period, we should note that the larger is the reference time horizon, the longer the EMA period should be and with this, we can generally say that the reference time horizon and the EMA period are directly proportional.
Just as mentioned earlier, the period is very cogent and traders should know that the higher the period, the more the moving average will be smoothed and this is as a result of the longer period that will be put into consideration. A longer period inhibits fewer signals and a shorter period inhibit more signals.
Below are the steps I took to modify the settings of Trix indicator having added the indicator successfully.
- The first step I took is to click on settings as shown below.
- The first setting that could be edited is the period or length and timeframe as can be seen in the input section. The length is a very important detail and it is advisable for scalp and intraday traders to opt-in for a shorter period while swing and position traders should opt-in for a longer period. It is important to opt-in for the length that suits one’s trading strategies though.
- Another thing that could be edited is the indicator and zero line color as can be seen in the style section. Also, the thickness of the **zero line could be edited.
- Lastly, the visibility of the indicator can be modified to suits one’s taste.
Just as I have been saying, for effectiveness, each trading strategy will work better with a particular period and so it is best to change or modify the period based on one’s trading strategies.
Being able to identify a market trend is a prerequisite to not making bad trading decisions and this makes the use of indicators such as EMA which is what makes up the Trix indicator a “hot cake” in the crypto world.
In the case of an EMA, the movement of the market price either above the EMA or below it signals or helps in determining the market trend.
In the case of Trix indicator, the oscillation of the indicator above or below the zero line helps in determining the trend that the market is undergoing. A change in trend from bearish to bullish trend is said to occur whenever the price crosses above the zero line. This situation in the market gives the buying signal just as we can see in the chart below.
From the ETHUSDT chart above, we can see that after the declination in the price which is also indicated by the Trix indicator, the price reversed and this was also indicated or confirmed by the indicator as it crosses above zero line and also, a buy entry position can be taken just as the indicator crosses above the zero line.
Likewise, a change in trend from bullish to bearish trend is said to occur whenever the price crosses below the zero line. This situation in the market gives the selling signal just as we can see in the chart below.
From the ETHUSDT chart above, we can see that after the inclination in the price which is also indicated by the Trix indicator, the price reversed and this was also indicated or confirmed by the indicator as it crossed below zero line and also, a sell entry position can be taken just as the indicator crosses below the zero line.
From mere glancing at the chart above, we can see that the Trix indicator is not suitable for taking entry and exit points but we can see how it filtered the price movements.
In part 1, we can see the price making slow downward movement as depicted by the candles and looking at the Trix indicator flat almost right on the zero line which connotes that there is no or adequate momentum to back up the bearish movement.
In part 2, we can see the price making slow upward movement as depicted by the candles and looking at the Trix indicator which is flat right above the zero line which connotes that there is no or adequate momentum to back up the bullish movement.
In part 3, we can see the breakout of the price which was sluggishly moving upwardly initially. This breakout can be confirmed on Trix indicator as it crosses below the zero line and this gave momentum in the downtrend in this situation, a trader can take a sell position.
In part 4, we can see that after the downtrend, the price begins to move upwardly indicating a trend reversal and which was confirmed by the Trix indicator as it crosses above the zero line. In this, a trader can take a buy position.
An entry can be placed when there is a change in the direction of the indicator after the price has touched the extreme level and this can be done with the use of 9 period EMA of the Trix indicator which can serve as a filter medium and with this, we can as well obtain a line signal that is similar to that of MACD.
Whenever the Trix indicator crosses above the moving average, a long position is taken and whenever the Trix indicator crosses below the moving average, a short position is taken and by doing so we are considering the approach of the MACD.
For the comparison and to see the difference between both indicators. I will be making use of a 9 period moving average signal line together with a 15-period Trix indicator and this combination will then be compared with the default chart of MACD (12, 26, 9). These two indicators are characterized by similar chart lines which swing below and above a zero line.
From the ETHUSDT chart above, we can that the Trix indicator is characterized with a pretty much smoother trend than that of MACD. The noises in the market have already been filtered out in the case of Trix indicator and this results in the smoothness of the signal line.
A strong and useful factor in determining signal information is the zero line of the Trix indicator. The swinging of the Trix signal line either above or below the zero line tells or gives the analyst a change in trend signal. Just as mentioned earlier, When the Trix signal line crosses above the zero line, it indicates a change from a bearish trend to a bullish trend and when the Trix signal line crosses below the zero line, it indicates a change from a bullish trend to a bearish trend.
The information gotten from the Trix zero-line cutoff can be enhanced by combining t with some other technical tools such as support and resistance, Fibonacci retracement, RSI, etc.
Divergence are reversal signals that help in determining trend weakness and future trend reversal.
Looking at the ETHUSDT chart above, the Trix indicator signals a bullish divergence during a bearish trend and this indicates or signals weakness in the bearish trend as well as a potential price reversal. The potential price reversal was later confirmed as the Trix indicator crosses above the zero line. On noticing the divergence, it is important to exit a sell position and take a buy position.
It is imperative to know as a trader that technical indicators are not 100% efficient or reliable as they could generate a false signal in the market.
Here, I will be combining the Aroon indicator together with the Trix indicator in order to filter out the false signal generated by the Trix indication. **Aroon indicator which was developed by Tushar Chandu in 1995 is an awesome and effective indicator that can be used in the identification of the trend a market is undergoing as well as the trend strength.
Aroon indicator is made up of two lines which are the up line (Aroon up) and the down line (Aroon down). The up line measures the strength of the bullish trend while the down line measures the strength of the bearish trend.
Let me just quickly explain how Aroon indicator works.
If the Aroon up is above the Aroon down, a bullish trend is signified.
If the Aroon up is below the Aroon down, a bearish trend is signified.
The crossover of these two lines could signal a change in trend.
Now let us go over to a chart and see how this indicator can help to filter out false signals generated by Trix indicator.
From the BTCUSDT chart above, we can see the false sell signal that was produced by the Trix indicator and it is false because using the Aroon indicator to confirm, we can see shortly after that the real signal is the buy signal and not quite long, the Trix indicator also produces the buy signal.
With this, we can see how I have to use the Aroon indicator to complement the Trix indicator in order to filter out the false signal.
Just like any other indicator, the Trix indicator also has its pros and cons and this is why it is best for every trader to have the best knowledge of the indicator that will suit his or her trading strategies best.
The Trix indicator is an efficient technical indicator for determining the price direction.
The Trix indicator helps in determining the buy and sell points in the market.
The Trix indicator helps in filtering out noises and unnecessary price spikes or fluctuations in the markets.
When the Trix indicator is combined with other technical, a very efficient and reliable signal can be gotten.
Lastly, correct price prediction can be gotten with the use of Trix indicator divergences.
Just like most or every indicator, the Trix indicator cannot be used alone. Just as we know that it can help in determining the price movements. However, entry and exit points cannot be gotten from it so, it is better to combine it with another indicator in order to filter out false signals.
Another major disadvantage of Trix indicator is that it lags behind the price and this is as a result of the price data point that its calculation is based on.
CONCLUSION
The cryptocurrency market is very volatile and so, the use of technical indicators tools is essential in making good trading decisions in the market. The Trix indicator is made up of three EMA and it is a momentum-based indicator that filters out noise and price fluctuations in the market. The Trix indicator can be used by traders to identify
market trends and buy/sell signals in the market when combined with other analysis tools.
It is imperative for one to know that no indicator is 100% efficient and so it is better to not just use one indicator to make a trading decision.