Trix Tricks

Hi Friends

Now that the much-awaited correction has come (hopefully ends here) and when we wait for the dust to settle down and the market becomes stable, maybe we can devote some time on our educational pursuits.

I would like to share the little knowledge I have gained on a often neglected Indicator TRIX, which I have found quite useful for indication of Trend Reversals.
TRIX calculates a triple exponential moving average of the Price input. It uses the difference between the current price and the previous price. Since most would find reading a long post tedious, I will skip the basics of TRIX indicator and proceed directly to the point of interest.

TRIX and Trend reversal

Now we will see how I use the TRIX to indicate the Trend Reversals. The TRIX Oscillates around zero. Extreme positive values indicate overbought conditions and extreme negative values indicate oversold conditions. Also the change in direction of the TRIX indicates reversal of the trend. The turn around of the TRIX normally leads the price giving an early indication of trend changes. Ideally one should Buy when TRIX goes to the extreme negative value and turns around and sell when the TRIX goes to the extreme positive values and turn around According to my studies turn around at extreme negative values provides very good entry points. See chart 1. However it is better to look for other confirmations before actual entry. If you have a screener to filter out stocks that are turning around from negative values you will come up with some good ones about to start an up trend. I also notice that most stocks have the TRIX turning around when price makes a higher pivot low (indications of a intermediate up trend). See enclosed chart 2. I use the Metastock to screen for stocks that are turning around from downwards to upwards. (I use a nine-day TRIX). I look for the negative TRIX values and usually it gives good list of stock with good chances to move up. Then I study the charts for the best possible candidates. As per my experience Turn around from up side to downside often takes one out of a good trade much before the trend actually turns down. So it is better not to base the trade exit on the TRIX. I feel it is better to ride the trend and try to get the maximum using trailing stop loss.

Just to summarize

1. TRIX reversals normally lead the trend reversal.
2. TRIX reversal from downward to upward provide good entry
opportunities especially at negative values.
3. Once you have a list of good candidates study the chart and look for
confirmation for entry.
4. It may be better not to Exit trades based on TRIX. Using normal trailing
stoploss.

.....oops.. I can only upload upto three charts....so let me continue in the next post...

Ok...Here we go again...with the continuation...


Also try plotting the Momentum of the TRIX. It provides the indications of reversal earlier than the TRIX itself. But never try to trade with it. It will simply whip you in and out. See chart 3.

Another interesting thing can be noticed when you plot a TRIX of longer period with TRIX of shorter period. When both move in the same direction the current trend is in progress. If they are opposite direction the trend is likely to reverse. Shorter TRIX crossing the Longer TRIX indicates reversal. See chart 4.

If you have time do experiment with this. I am sure you may find this a helpful tool. If you are using a trading system, which you are comfortable with and successful, don’t try to complicate it by trying include TRIX in it. Use it as an additional aid only. As far as Trading system are concerned, remember ..KISS... Ya….Keep IT Stupid Simple...

All Seniors...Amit, Saint,Ravi and all TAs in the forum.... please...post your views and comments on this..

Hello Karthik!

Thanks for taking time and sharing your knowledge with us.
Looking forward for more posts like this.

Keep it up...
Regards

Roneeth

Hello Karthik!

Could you please name me the basic indicators one should know.

Regards

Roneeth

Hello Roneeth

In my opinion there is no such thing as “basic indicators one should know”. One should choose indicators which he can comfortably interpret.

There are hundreds of indicators, from simple to highly complicated. So choosing an indicator can be quite confusing. Also the same indicator may behave differently with different stocks.

Though there are so many indicators, the most used and talked about indicators are the oldest ones that have stood the test of time… for example the moving average, MACD, stochastic. RSI etc.

Indicators are generally divided into four categories namely Trend, Momentum, Volatility and Market strength. Let us look at the commonly used ones in these categories.

Trend : Moving Averages (simplest & quite effective), MACD

Momentum: (Indicates Over bought/oversold conditions) RSI, Stochastic, William%R

Volatility : Bollinger Bands, CCI

Market Strength : (Volume Based Indicator) OBV, MFI

(Of course there are many more in each category. I just listed the most commonly used ones)

Probably the best way may be to choose one of each kind. Select what you feel comfortable with and learn their intricacies. Choose indicators that compliment each other.

Learning to interpret the indicator is more important. Of course overtime you will get good at it. Indicators are the building blocks of good trading systems. Go for simple Indicators integrated into a simple trading system. Like I said before KISS (Keep It Stupid Simple) your trading system.

Sorry.... a simple question….and….a complicated answer . Unfortunately it is so in life too.

regards

Karthik

Hey Karthik...fabulous stuff...excellent indeed.
I had seen this title only this evening and was meaning to write earlier.
Keep it up Karthik, I look forward to more.
Will be back on NIFTYFIFTY tomorrow...quite late tonight.
Regards.

Great stuff,Karthik.........keep em comin,my friend.......Great stuff!!

Saint

Hello Karthik!

Thanks for the explanation. Sincerely Appreciate your effort for answering my query ,will do some study and get back again.

Regards

Roneeth

Hi Karthik,

Was looking through your write-up again.........just an add to the writeup.Like Karthik said,better for entries,not exits.Another neat feature of TRIX is the bullish and bearish divergences.......Was a nice bullish divergence on the TRIX and the RSI on the weekly charts,before prices started moving upwards forming the current bull run from May 2003.

Simply put,TRIX below the signal line +bullish divergence if present =bullish

Once in,trail stops,etc etc like Karthik mentioned......

Thanks Karthik for sharing this with us........great going!!

Saint

Roneeth, Amit, Saint

Thanks for your kind words of encouragement.

Learning and Sharing....Amit and Saint..This ..I learnt from you guys...Two months in this forum has put my TA knowledge in a different orbit..Thanks to you..

regards

karthik