TRIX Indicator is one of the best technical analysis tools for anyone looking to ascertain market conditions, overbought or oversold while trading. Additionally, it provides valuable information on the solid underlying momentum.
How it works
As an oscillator, TRIX readings fluctuate around the zero line. Consequently, whenever positive readings emerge and continue increasing, it implies the asset understudy is entering a period of overbought. Likewise, whenever negative values appear, the same implies oversold market conditions whereby an asset has been sold significantly.
The tool can be used to measure the strength of momentum in a given direction. Whenever positive readings emerge, they imply a rising momentum, either up or down. Likewise, whenever the readings decline and enter the negative territory, it implies the momentum either on the buy or sell-side.
Additionally, whenever the indicator crosses the zero line from below and starts moving up, it is interpreted as a buy signal, and people use this opportunity to find long trades. Similarly, it is interpreted as a sell signal whenever it crosses the zero line and starts moving lower.
Implementing the TRIX Indicator
While TRIX can serve many purposes in forex trading, it is advisable to use it with other tools for more accurate results.
TRIX and SMA trading strategy
With this strategy, the indicator is implemented in combination with a Simple Moving Average. In this case, two SMAs are deployed on the security understudy; one fast-moving, say 10-SMA, and another slow one 20-SMA. The chart set up is as shown below.
Conditions for a Buy
In the EURUSD chart above, it is clear that a buy signal occurs whenever the red line of the Trix Indicator crosses the green line from below and starts moving up. While both lines are below the zero line and deep into negative territory implies oversold conditions. In this case, the probability of price bouncing back and edging higher is high.
The buy signal is only confirmed when the fast-moving average 10-SMA in the chart crosses the slow Moving Average 20-SMA and starts moving up. The crossover signals building buying pressure, and that price is likely to continue moving up.
Conditions for a sell
Short positions should be eyed when asset prices are deep into overbought conditions, as implied by the Trix indicator. In the EURUSD chart below, the indicator is way above the zero line, deep into the positive territory.
When the red line crosses the green line from the top and starts moving lower, it should be a warning sign that bears are increasingly piling pressure. With both lines on the positive zone, provide ample time to sell high.
The sell signal is only confirmed as soon as the 10-SMA crosses the 20-SMA in the chart and starts moving lower, signaling the start of a downtrend.
Setting stop loss
In the case of a buy trade, a stop loss can be set a few pips below the entry point to protect against price reversing and continuing to move lower. In case of a short trade, a stop loss should be set a few pips above the entry point to protect against price correcting and starting to move higher.
TRIX crossover strategy
This strategy works whenever the tool is used in isolation without any other technical analysis tool. The strategy works best for traders looking to trade trend reversals that often signal a market momentum shift.
A bullish crossover signifies it is time to look for long trades. It occurs whenever the faster TRIX line crosses the slower signal line and starts moving up. The crossover implies a momentum shift to the upside, and that price is likely to continue edging higher. The TRIX line crossing the zero line and moving up signals build upward momentum.
A bearish crossover, on the other hand, occurs when the fast-moving TRIX line crosses the slower signal line from the top and starts moving lower. The same implies bears are pilling pressure and that price is likely to continue moving lower. The TRIX line is crossing the zero line, and moving lower signals a buildup in bearish pressure.
Trix divergence strategy
Divergence is a common phenomenon that signals potential price reversals as implied by technical indicators. Such scenarios occur whenever the pace of the indicator’s readings diverges from the asset’s price. For example, the asset price might make a higher high, while the indicator shows a lower high, indicating a divergence.
Whenever divergence occurs, it indicates that the underlying trend is losing momentum and that price is likely to reverse and move in the opposite direction.
In the chart above, it is clear that instead of the TRIX forming lower lows as the price was moving lower in the first half, it moved higher. The formation of a higher low on the indicator implied that the downward pressure was losing momentum and that price was likely to reverse and start moving up, which happened afterward.
Similarly, when the price moved up significantly, it reached a point of overbought. The easing of buying pressure resulted in the TRIX moving lower and forming lower highs instead of moving up as price was trending up. The result was price correcting and starting to move lower.
The TRIX indicator does not provide accurate buy and sell signals all the time. Periods of false signals are common, thus the reason why traders must employ sound risk management.
False positives occur whenever the TRIX and signal line cross briefly and then reverse immediately. Such occurrence is common when using the indicator on shorter time frames where the price is extremely volatile.
Points of false signals are also known as inflection points. In the chart above, it is clear that there is a time the TRIX red line crossed the signal line from above to signify that price is likely to continue moving lower, only to reverse immediately and continue moving up.
The second inflection occurs when the TRIX crosses the signal line from below to signal that the price is about to reverse from a downtrend and start moving up only for the price to continue moving lower.