Trading with the TRIX indicator
The TRIX indicator a customized trading indicator widely used by traders across all markets. The indicator is plotted in the sub-window and behaves like an oscillator. The indicator basically smooths the price data and looks to the time frame to which it is applied.
Based on the time frame, the percentage movement is then smoothed and displayed as an oscillator. Due to this,
the TRIX indicator filters the noise from the price charts and shows the momentum of the price of the security.
However, since the TRIX indicator applies a smoothing factor, it is very lagging in nature. Therefore, sudden changes to the price action takes time to be reflected by the TRIX indicator. There are of course both pros and cons due to this behavior.
In one way, the TRIX indicator helps you avoid the noise in the markets. But when shifts in the direction of the price are sudden, the TRIX indicator is very lagging in nature and does not show this on the charts immediately.
This means that there can be a significant delay between the price behavior and the TRIX indicator.
Still, the TRIX indicator is one of the very popular custom indicators that you can find. We call it custom indicator because it is not available as a default indicator on most trading platforms.
For example, if you are a forex trader, chances are that you will not find the TRIX indicator as one of the default indicators. You will have to import the indicator in order to be able to use it.
There are many different ways that the TRIX indicator can be plotted. Below is an example of the standard TRIX indicator design.
The TRIX indicator above shows the up and downtrends in the price chart. The vertical lines show you how the TRIX is reacting when prices are moving up and when they are moving down.
Notice that there is a significant lag between price and the TRIX’s direction. This is something to bear in mind about the indicator. You will find more information about why the TRIX indicator lags so much in the later part of this article.
How does the TRIX indicator work?
The TRIX indicator behaves like an oscillator. Therefore, it moves up and down from the zero line. This is also known as the baseline. When the TRIX indicator falls below the baseline, or the 0-level, then the price is considered to be in a downtrend.
Likewise, when the TRIX indicator is above the baseline or the zero-line, then the trend of the price is said to be in an uptrend. It is as simple as that. The TRIX indicator is able to plot this because of the way it is constructed.
When there is a strong momentum surge to the upside, this is reflected by the higher values of the TRIX indicator. Likewise, when you see a strong downward momentum in price which translates to higher percentage change, then you can expect the TRIX indicator to fall below the zero line.
Traders use the TRIX indicator mostly to confirm the trends. Of course, one might argue that trends can also be confirmed by the moving averages. However, remember that the moving averages only show you the average of the price over the period of time.
Thus, the general explanation of a trend using the moving average is that when price is above its average price over a period of time, it is in an uptrend and when price is below its average price, the price of the security is in a downtrend.
The trends which are based on moving averages are somewhat limited. But when you use the TRIX indicator, based on the percentage change can show you whether prices are moving up or down.
In a way, TRIX is a directional indicator. A directional indicator is one which can show the user, or the trader which direction the trend is moving. The TRIX indicator thus helps to confirm the trends and alerts the trader to make the appropriate decision.
Besides trends, the TRIX indicator is also a valuable tool when it comes to spotting divergences. For example, when the TRIX indicator fails to make a new high but price does, it is a bearish divergence.
Conversely, when the TRIX indicator fails to make a new low but price of the security does, then it is a bullish divergence. Divergences are a common method of trading when it comes to using oscillators.
In this aspect, the TRIX indicator is no exception either. However, the divergence based on the TRIX indicator can tell you if the momentum is rising or slowing. Typically, prices tend to change direction by first signaling divergence or slowing momentum.
How is the TRIX calculated?
Calculating the TRIX requires a series of iterations. This is because it is a smoothed indicator. In total, the TRIX indicator is smoothed three times (which explains the strong lag between price and the indicator itself).
The indicator starts off with a 15-period exponential moving average. Once the values are derived, it then applies another 15-period EMA from the first iteration.
Finally, the one-period percent change is applied from the EMA from the third iteration. Note that the EMA is in itself a first iteration of the price. Thus, by the time the second EMA iteration is applied, you can see that the moving average has been smoothed three times.
The final step results in the TRIX values. Typically, the settings for using the TRIX indicator can vary. Using a setting configuration of 40 for example can make the indicator to lag even more. This will make it less sensitive to price and therefore, you might have to adjust your stops and take profit levels accordingly.
On the other hand, you can however increase the sensitivity by increasing the period settings. Given the fact that the indicator is already smoothed three times, using a short time period can definitely help.
But this is only ideal if you are an intraday trader.
It is important to understand the inner workings of the TRIX indicator. Thankfully though, you do not have to manually do the calculations. Now a days many trading and charting platforms can do this automatically for you.
You will just have to import the indicator onto your charts and configure the settings and let your platform do the rest.
There are many different versions of the TRIX indicator. In some modified TRIX indicators, you will find that a moving average is also applied. This moving average is applied to the TRIX indicator. Thus, in a way, the TRIX indicator now has two lines. The main TRIX and the moving average of the TRIX.
Traders tend to use this modified version as another way of buying and selling whenever there is a bullish or a bearish crossover of the TRIX and its moving average version.
Installing the TRIX indicator MT4
You can download the free TRIX indicator and install it to your MT4 trading platform. You can navigate to the indicators folder in the MQL4 folder of our installation of the trading terminal and paste the file there.
After you do this, you can then power up your MT4 trading terminal and refresh the indicators from the navigation window so that the TRIX indicator is displayed. Now simply drag and drop the indicator onto the chart for which you want to analyze using the TRIX indicator.
You will be presented with the TRIX configuration window which looks as below.
MT4 Configuration of TRIX indicator
As you can see, there are four main points to configure.
TRIX_Period: This is the basic setting that we discussed in the earlier section. The higher it is, the less sensitive and lagging the TRIX becomes. The shorter it is, the more sensitive the TRIX is.
Signal_Period: This is the moving average of the TRIX. You can set this to any value of your choice. However, make note that you will also need to use a value that falls in line with the TRIX setting. For example, you cannot use a short value on the main TRIX but use a higher value on the signal period.
Signals: When set to true, you will get the signal alerts on your MT4 trading platform
Countbars: This is the lookback period or the number of previous bars to count for the TRIX indicator to start calculating the values. The default is 1500 which should be a good starting point. However, if you have more data on your MT4, then you can change this value much higher as well.
Once the TRIX indicator is applied to the chart, it should like this on your MT4 trading platform.
TRIX indicator on MT4
You will notice that the TRIX indicator for MT4 uses the additional moving average on the TRIX itself.
How to trade with the TRIX indicator?
Staring with the very simple strategy, buy and sell signals are generated when the TRIX indicator cross the zero line from below or from above. Depending on the direction, traders can take the appropriate buy or sell signal.
It is advisable that you make use of additional confirmation tools if you want to trade successfully with the TRIX indicator.
You can also gauge the momentum by looking at the TRIX indicator and compare the highs and lows to that of price. Assuming that you are not using a long period, the TRIX indicator can signal divergence when you are using smaller values.
These divergences can be a great way to anticipate potential reversal in the price of the security. It is recommended that you trade the TRIX divergences using other price action methods of analysis such as support and resistance levels and trend lines where required.
In the modified TRIX version for MT4, you can take long signals only when the TRIX is above zero and when there is a bullish crossover of the MA and TRIX. Likewise, short signals can be taken when the TRIX is below the zero line and there is a bearish crossover of the TRIX and its moving average.
Of course, traders can develop different types of trading strategies based on the TRIX indicator for MT4.
What are the limitations of trading with the TRIX indicator?
Every indicator has its pros and cons and the TRIX is also not immune to this.
The TRIX indicator firstly does not accurately depict what is happening in the price of the security.
You will find that prices can trend higher while the TRIX indicator points lower. This is due to the smoothed factor and the lagging effect from price upon which the TRIX indicator derives its values.
Traders should also be aware about false signals that can be generated. Due to the lagging nature, not all divergences can turn out to be right, resulting in a direction of the change of the price action.
You will also find that the TRIX indicator makes false crossovers from the zero line. You might mistake this to be a buy or a sell signal, but this is the TRIX simply reacting slowly to the shifting momentum in the price action. It is recommended that you should use additional confirmation tools when using the TRIX indicator.
One way to avoid the lag in the TRIX indicator is to use a setting that is much smaller. This will enable you to make the indicator at least a bit more reactive to the evolving price action.
Some traders tend to use the TRIX indicator as a way to determine where to set their stop losses. This can also be quite risky if you only follow the trading signals generated from the TRIX indicator.
The TRIX indicator – Conclusion
In conclusion, the TRIX is a versatile custom indicator. It falls into the category of a momentum and a directional indicator. In a way, the indicator can confirm the rise and fall in momentum on the price chart.
The TRIX indicator also shows you which direction prices are moving. This indicator allows you to spot potential reversals using the crossing of the zero line and also by means of the divergence that is formed.
The TRIX indicator is widely used among day traders. It works best in markets where trends are well established. For example, the futures commodity markets are a good place where the TRIX indicator can be put to very good use.