Trix displays the percent rate-of-change of a triple Exponentially smoothed Moving Average of the closing price.
Calculate an n-period Exponential Moving Average of the closing prices (yields MOV_E1).
Calculate an n-period Exponential Moving Average of MOV_E1 (yields MOV_E2).
Calculate an n-period Exponential Moving Average of MOV_E2 (yields MOV_E3).
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Formula
TRIXt = ((MOV_E3 - MOV_E3t-1) / MOV_E3t-1) * 100
Parameter
Period. The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. Period refers to the periods for the calculation of the Moving Average. Workstation uses a default value of 9.
Interpretation
The TRIX indicator oscillates around a zero line. Its triple exponential smoothing is designed to filter out insignificant cycles and show the prevailing trend of the base instrument.
As the indicator reacts very sluggishly to market changes, trades should be placed when the indicator changes direction. Most traders prefer to plot a 9-period Moving Average of the TRIX to create a "signal" line, much like in the MACD indicator. When the TRIX line rises above its average, a buy signal is triggered. When it falls below its average, a sell signal is triggered.
The further away from the central line the TRIX moves, the more successful the trend signals.
Literature
Appel, Gerald: Winning Stock Market Systems. Signalert Corp., Great Neck, N.Y. 1974.
Babcock, Bruce: The Dow Jones-Irwing Guide to Trading Systems.